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

Good day and thank you for standing by. Welcome to the presentation of Alligo's Full Year Report 2022 Conference Call. [Operator Instructions] Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Clein Ullenvik. Please go ahead.

Okay, everybody. Welcome to Alligo Q4 report. We put together a little presentation for you. And to guide you through that will be, as always, Irene Wisenborn Bellander, our CFO; and myself, Clein Ullenvik, CEO. The agenda for today is we'll start off with some highlights. Looking back on the quarter, last quarter, a business update. Then as, you know, we have one theme per quarterly presentation. It has been the logistics. It has been assortment and sustainability. This time, we'd like to talk a little bit about acquisitions. And who knows what the future will bring? It could be own brands. It could be how we work with our service offerings and so forth. But this time, it's acquisitions, some financials, summary and outlook and then we open up for questions. But before that, we have 4 slides. Just a quick reminder of what Alligo is. We'll probably reduce our spotlight to less slides next time, but lifetime with 4 slides. We are a leading player in workwear and personal protection and tools and supplies in the Nordic region. We believe in a common platform and integrated business model. So if you look at the little boxes there, Alligo is where we all belong. We have our core values. We have our strategies. We have our plans in Alligo, but you might meet any of our brilliant salespersons with a business called Tools, Swedol, Univern, Grolls or potentially from any of our independent specialist companies. So we work with several different brands, but we all belong to the Alligo family. Revenue-wise, Sweden dominant are fair-sized business in Finland and in Norway, even more dominant Swedish dominance related to the profitability. Own brands at a little shy of 20%. Very strong brands, not any copies at any way or shape or form Bjronklader, Univern and WebPro really, really strong brand and others in the Tools side. We have some 200-plus shops throughout the Nordics. We have 8 customer segments and for obvious reasons, oil and gas and fishing and agriculture, of course, is more dominant in Norway than anybody else, anywhere else, but these are the 8 customer segments we have defined as our main focus. We value the market in Nordics to be somewhere above SEK 50 billion. And now [indiscernible], as I said, we want to be a fully integrated company. We believe that is the most efficient way of running this type of business. And towards the customers, we'd like to be as strong as possible. And by that, we mean that you will not find our own brands in any of our competitor stores or web shops. We use our own brands to make us strong facing the customer. If you look at the offering, services is an important part. We'd like to have customer that appreciates our offer and what we are good at, not only supplying products at a low cost or price as possible. We try to prioritize customers that appreciate our model. And the go-to-market model is you can meet our salespersons. You can go into external sectors and you can go into our shops, or you could buy from the web. But you should have the same look and feel, whichever channel you choose to contact with us. So highlights Q4. We have profitable growth in all markets, but I think we touched that already last call, we have some tendencies to hesitation from our customers from November and onwards. We're not 100% sure if this is a market signal or if it's the weather, which hasn't been favorable for us, but we have seen some hesitance from our customers since November in Sweden. We made a number of acquisitions, one which was finalized and 3 that was finalized just a few days into January 2023. Our revenues increased by close to 12%. Our EBITDA increased by 19%. So we had an EBITDA margin increase from 10.3% to 10.9%. And we had a cash flow this quarter amounting to SEK 417 million. So our business condition just in one slide, the market situation, strong in Norway and Finland. As I said, tendency to slowdown in Sweden, which we are closely following. But we as a management, we are very, very nervous people. So we are trying to be as proactive as possible. We are now in price adjustment times. This is February, the normal price adjustment time for us. We try to do this in such a intelligent and clever way as possible. I said in the last call that we could increase the prices. We have a good pricing power, but we also needs to be clever, so we don't price ourselves out from certain categories. So we try to balance that in a good way going forward. And we also review down to single customers, what the profitability, what it's like and what the level should be on. So we are down with details when we manage our business. We have a good delivery capacity and the macroeconomic factors, I don't think I even need to mention, it's obvious for everybody. It's an uncertain world, geopolitical turbulence and where are we in the business cycle? That's the million dollar question. So it's the same for us as for anybody else. So what do we do? In the light of this, we have our growth initiatives, of course, throughout all the countries, we try to, as you know increase the share of small and medium-sized customers. It doesn't mean that we don't want the larger customers, but we want to increase the number of small and medium-sized customers. We have a lot of ongoing initiatives. We are developing our service offerings. That makes us more competitor, stronger. We have a lot of things already in place and more will be launched. And we do acquisitions, which we'll come back to shortly. Cost initiatives, the whole integration of Tools, Swedol has been one huge efficiency project. So we are taking out the efficiency effect of that integration and we are preparing for potential needs to decrease cost. Price increases, as I touched upon just a few seconds ago and try to do that in a clever way as possible. We are renegotiating suppliers from Far East, trying to get pool volumes to fewer suppliers, trying to offset as much as possible of the dollar effect we are seeing on our Far East purchases. Stock reduction, we try to reduce the net risk, not as it has yet to reduce the turnover rate. We're increasing the turnover rate. We're trying to reduce the inventory levels. And as you know, we strategically made that decision that we'd like to have own brands at home when we launched them into our system. The worst thing we could have done would have been to say, now we launch our brilliant own brands and we don't -- and then we run out of stock. So we have high stock levels and we are now balancing that. Efficiency measures, as I mentioned, has been done. We have delivered as agreed upon with the merger between Tools and Swedol. And we're also now fine-tuning the sales organizations in all 3 countries. Acquisitions. That has been a good year looking back on 2022. We focus on acquiring well-run businesses. We do not want to acquire any -- I don't know which side you are on, any acquisitions which are turnaround cases. So we'd like to make acquisitions. And within our normal segment we'll be fully integrated and profile and media companies, we are -- have been acquiring quite a few of them, will be kept separate for strategic purposes. It doesn't make sense to fully integrate them. We have a long-term process with a long list, identifying acquisitions we'd like to make. And in some cases, it can take quite a while, of course, before you get into the situation where you actually do the acquisition. So we have a long, long list. And we finance that with cash flow from our operations and we also have room to do that financing. And just quite obvious slide to make acquisitions in the existing markets and the existing customer segments and product categories. It's a sweet spot and like to make as many as possible, of course. But when we go beyond that, it's either new markets or new customer segments and new product categories, not those in combination that we do not want to do. And we see enough potential to do within the 3 identified boxes, not having to go to the fourth one that would be too risky to do that. And looking at the 9 acquisitions we did during 2022. It's fun to look back and realize 8 of those 9 were bilateral. When we contacted them and we've initiated a discussion and we came to a deal, it's only 1 out of those 9, which was in a structured process. And we, of course, while we want to have bilateral discussions not being in any bidding process. So it's fun to look back at that and we made 9 acquisitions, out of which 8 was bilateral. Financials, over to you, Irene.

Thank you. As Clein mentioned, we continued to benefit from profitable growth in all markets in Q4. Revenue increased by 11.8% to SEK 2.7 billion and contains a rather significant inflation effect. Revenue has been favored by positive currency effects and 2.8% was related to acquisitions. Organic growth in the quarter reached 6.7%, driven by positive sales development from larger industrial customers in Finland and Norway, but there was some tendency to slow down in Sweden from November onwards. EBITA increased by 19% to SEK 298 million in the quarter, corresponding to EBITA margin of 10.9%. The improvement in profit can be seen across all countries and is a result of growth, improved margins and synergies between Swedol and Tools. The somewhat increased proportion of owned brands also contributes positively, but we have a negative country mix that contracts. If we move on to the next slide, sales in the Swedish business increased by 7.7% and were positively affected by acquisitions. Organic sales reached about 6%. Sales were good at the beginning of the quarter, but weakened during November and December. The improvement in profit in Sweden is driven by growth, margin improvements and synergies between Swedol and Tools. After a weak start of the year in Norway, which stabilized under Q2, we have had positive sales development in the third and fourth quarters. Total sales increased by 20.4% in the quarter and organic sales reached about 9%, driven by good market development in the oil and gas segment. The improvement in profit is driven by growth and integration synergies and work to improve margins and sales management was intensified during the quarter and there is also a focus on increasing the share of small and midsized customers. In Finland, we have a continued positive sales trend among larger industrial customers and sales increased by 19% and organic sales reached like 6%. The result was strengthened because of growth and decreased margins and our measures related to improved sales management have had an effect. The customer mix remains unfavorable, but activities such as investment in stores are ongoing to attract and increase the share of small and medium-sized customers. The fourth quarter is seasonally the strongest quarter from a cash flow perspective. Cash flow from operating activities in the fourth quarter amounted to SEK 417 million compared to SEK 432 million last year. Excluding IFRS 16, it was even a slight improvement in the quarter compared to last year. The inventory levels continued to increase in Q4 and we have an inventory buildup of SEK 349 million during the year, affecting the operating cash flow of SEK 507 million for the full year. Approximately 50% of inventory buildup, excluding acquired businesses, is a result of higher purchase prices and unfavorable currency effect, primarily U.S. dollars. The other 50% is related to increased volumes of our own brands and the ongoing assortment much. The investing activities are related to M&A activities of SEK 144 million and consists of fixed acquisitions during the year, but also store and central warehouse adoptions and IT-related investments. The ratio of CapEx to depreciation amounted to a multiple of 1.4, driven by the integration activities between Tools and Swedol. Finally, the financing activities related to the amortization of leasing liabilities, dividend paid and increased usage of the revolving facility. In summary, our focus on product availability and investments in our own brand range have tied up more capital and temporarily reduced cash flows. The group's net debt amounted to SEK 1.5 billion at year-end and the unutilized credit facilities amounted to SEK 961 million. The increase in net debt compared to last year is driven by integration investments, inventory buildup, dividend paid and M&A activities. The ratio of net debt-to-EBITDA amounted to a multiple of 1.8. And our covenants are related to interest coverage ratio and equity assets ratio. These are fulfilled at year-end and there is a good headroom before reaching the threshold. Moving on to next page and our performance in 2022 in relation to our financial targets. You can see that we had an organic growth ahead of our target of 5% and a solid EBITDA margin improvement. The leverage is well within the range and the Board of Directors proposes a dividend for 2022 of SEK 3 per share, corresponding to 31% of the net results. Handing it over to Clein for summary and outlook.

Thank you, Irene. 2022, in summary, we had a financially stable year despite all those things we did. We tend to forget about that, but it was a crazy year external things affecting us and we also created some own internal hassle and we came out, we think, quite okay. We have also launched a new way of running the sales organizations, which we are now fine-tuning, which will be more efficient and effective going forward. As I said, 9 acquisitions. We like to continue to make acquisitions strategically. We have a list of acquisition target and we will continue to fill up that list. That's an interesting thing we're running. Positive development in Finland, as you might remember, we had a slow start last year in Finland. We changed management and we implemented the Alligo way of running our businesses. So it's not only that we are happy that our Finnish market is -- our Finnish business is developing. It's also a sign that our Alligo model works because when we implement the Alligo way of doing things in Finland, it changed to the better. We have a good delivery capacity. As we said, we have high stocks, but it doesn't necessarily mean that we are having good availability, but we do have. So nobody from any sales organization anywhere that are complaining on any shortages at this point. An increased focus on sustainability, of course, for many reasons, not only the greater good, but also it's a competitive advantage if we are better than the rest than we believe we are. If we change to outlook 2023 and we are quite happy that we are where we are, that we have done our homework. We have done all these integration activities. And if the market looks uncertain going forward for us, like for everybody else, we are happy that we are in the situation. We are with our fully integrated model and the management, which are on our toes, ready to take any actions needed. We continue to develop our offer and also try to have a standardized assortment as possible, that's a key for our profitable future to have a defined standardized assortment and work in close partnership with suppliers that we select. Good availability, as I said, continued sales in assortment management, price management to do this in a clever way, not sending our customers to our low-price competitors, but to be clever in the way we price. And we have a lot of actions ongoing. Irene mentioned that we are investing in our shop concept to be more attractive for small and medium-sized customers. So we even had a good step-up of shops already for small and medium-size customers, but we need to invest in Finland and Norway and we are. And we're continuously looking at the organizational cost structure. It hasn't been possible when we have been doing all these integration activities and we have launched the new sales organization. But with that in place, now you can start to fine-tune and work with efficiency in a better way. And we need to do it. We will do it. And on top, the cherry on top will be to spike this up, we continue to do acquisitions. So to conclude this before we open up for questions, 5 reasons to invest in Alligo. Attractive market growth and resilient customer segment, we believe in. Our scalable platform is for us the way to do business. Our own brands gives us an incredible competitive advantage. Sustainability as an integrated part and we will be -- continue to be a leader in consolidating the Nordic markets. So then we open up for questions.

[Operator Instructions] Now we're going to take our first question. And the question comes from the line of Emanuel Jansson from Danske Bank.

A couple of questions from my side. And I think if we start in the region of Sweden, where you have seen a tendency of a slowdown among customers. Can you give us some flavor on what kind of customer is? Is it mainly small, medium customers or larger customers and in which segments? And also can you give us some picture on current trading in that region as well?

As we said, it's -- there are some hesitance from our customers. And we also really know is a weather effect or is it just uncertainty or if it's reality, but we have seen some slowdown in the market in Sweden and among -- across the line, but mostly in construction segment, i.e., for us, small and medium-size customers. But that we will go for growth initiatives with our market shares to take also in a declining market. So we need to get a grip of this with a more efficient sales organization and all this in place, but it has been some hesitance, that's for sure, among the smaller customers.

Yes. Okay. That's clear. And to continue in Sweden and on the competitive landscape, you say that you see some hesitance among customers. Have you also seen that customers are trading down to even cheaper alternatives, for example, heading to maybe [ Uvala ] or something in Sweden, for instance, have you seen that -- yes.

That's a good point. That's exactly what I mean when I said we need to be clever because traditionally, our offer in the Swedish market has -- and it will be, again, competitive in a slower market normally in the -- in all concept, which will take market shares in a slower market. So if we act in a responsible way and in a clever intelligent way, we can continue to do that. But then we need to be careful now in this high inflation economy, just not pushing through extremely high price increases and thereby pushing the customers just as you say to real low-cost competitors. So we need to take this opportunity to actually improve our position, not pushing our customers to real low-cost competitors. So that's exactly what I mean when we said we need to be intelligent and I believe we are. We have a good grip on that, that's exactly what we're aiming for.

Sounds good. And I think if -- one last question on Sweden. Very impressive EBITDA margin this quarter. How much can you continue to expand the margin in this region you believe?

Good question. We have our financial plan we are following. We are performing just as we have promised and we have a high degree of self-confidence. We know what we're doing and we know what we are capable of. And I wrote also in the CEO part of the report, we are not at all a fine-tuned company. We have just recently merged 2 fairly big companies. There are a lot more to take up. But having said that, we also need to be aware of what's happening on the market. But we are for sure, not 100% optimized structure as we are today.

Yes, that's very clear. And I think I got 2 more questions. Can you give us some idea on how big proportion of owned brands out of sales in each region, how that look in the moment? Is it more in Sweden compared to Norway and Finland? Or is it more or less the same, around 20%?

It's higher in Sweden and that's what traditional reasons that the country with the highest old Swedol share. And there we have extremely high share. But it's being rolled out. And I think I've mentioned before, otherwise, I can do it again. [ Augusto Shoes ], for example, an incredible growth. So whenever we launch it somewhere, even larger customers have more or less directly, I hope -- I shouldn't mention any names, but in Finland large industries just looking at our assortment on shoes and then we'd like to have this. So we start with shoes has had a good effect so far and it will follow with the clothing brands, with the workwear brands and gloves and all. So we are following the plan we have as we said initially, out of all the synergies we should accomplish that this will take the longest time because in some cases, large customers, you have an agreed assortment. It will take some time to launch that. So we'd like to have a very competitive offer, our own brand in combination with a strong external brand. Then we will have a competitive mix. That's also why we have these high stock levels. We don't want to have any reasons for a salesperson in Finland, for example, saying it's no use for me talking about Gesto workwear since we are out of stock. That's what we did not want to have. That's why we invested a lot in the high stock levels.

Yes. Okay. Yes, perfect. And final question from my side. Can you also give us maybe some flavor on what industry or customer segment you're experiencing the best and also may be less good demand in this quarter in all of your regions?

Emanuel, in -- across the regions, manufacturing is developing well. And unfortunately for us, that's where we have the biggest customer insights. And as I said, we'd like to increase, not necessarily decrease on the large customers, but in the share of small and medium-sized customer, we'd like to increase. So it's difficult for them to catch up when the manufacturing industry side is growing. So especially in Finland, but across all 3 countries, the manufacturing industry is growing.

Now we're going to take our next question. And the question comes from the line of Karl-Johan Bonnevier from DNB Markets.

Yes. Congratulations, I guess, I'd also say on the very good report and solid development. And just to come back on your comments on Sweden and the hesitance. I notice you ducked on talking about current trading on the previous questions. Has the trend escalated during Q1 so far? Or is it the same kind of level? Or where do you see it developing for them? I understand that the January-February is not the biggest months for you, so.

And you gave your answer directly. No, it's -- we took a few days into the small month of January and a few days into February, but we see hesitance absolutely, but we also see opportunities to take market shares. So we have great self-confidence and we will [indiscernible] whatever market shares are out there. But there has been some hesitance and I can understand that. I mean, high interest rates, fuel rates going up, costs for our wonderful customer segments. So the small and medium-sized customers, of course, they are more cautious when they make their purchases. So it's understandable. But I also know what this machinery can do when we get our act together and we start with our marketing machinery and our sales machinery, when that starts working again. I'm not so worried over time. But now since November, we've seen some hesitance and that needs to be [indiscernible], but that doesn't mean that we have any bad self-confidence going forward.

And I know this is also a difficult question for you to really say dig into. But looking at the organic growth, could you give us a fair assumption of how big the pricing components is in that?

Yes. No, of course, it's a fairly high single-digit number, of course, in inflation, that's for sure. But also, we are -- I don't know much, we communicated that, but we are also phasing out unprofitable customers. So if we have an inflation effect when you look at the top line, of course, you have potentially in the short time, also, we have gotten rid of volumes that we want to get rid of and we are phasing in new accounts which are more of those customers we'd like to have. We will continue to communicate and present those because I think it's quite fun. But of course, inflation is the [indiscernible] for everybody else, which has been reporting also for us.

So it's a best assumption, underlying volume is basically flat, which I guess would correlate quite well with a stable market as well looking at volumes?

Yes. Absolutely. And we are looking back what was the year -- what we have done. I think you were the one commenting that, Karl-Johan, on Q2 or Q3. Q3, I guess, to survive 2022 the way we did, considering all the activities. I'm not so extremely unhappy about that.

And looking at all the things you now put in place during 2022 -- 2021, '22, I should really say. And looking at the original synergy assumptions you had and efficiency extraction opportunities you saw when putting the Tools and the Swedol operations together, how much of that have you now been able to extract and how much is yet to come?

In all -- as we communicated last time, we have now said that the integration project as such is fine and we have delivered on everything we said. But there is more to get, but we say it's more operational, but the rollout of own brands, there's more to come, of course, through this defined assortment to more carefully select which supplies, which you have fuel supplies and tighter relation with those suppliers. So there is more to get, of course, and the whole sales machinery, it was not a happy sales force around summer and early autumn, all the problems we have there. So just to have all that in place and start dealing with traditional -- the traditional trade of sales to come back to that is for us, it's a lovely time ahead. So it will be fun to see when this machinery kicks in.

So if you look at the earlier assumption that when this was finally done and finally the value efficiency was extracted and delivered, getting up to 10%, you are basically now where you want to be on that journey to get to the 10% where the things you have put in place. And then this basically the timing difference is to also get this into the reported numbers?

Yes. If we -- exactly, Irene showed the slide, solid performance in 2022 and those 4 KPIs where the profitability steps from 2021, '22. I think we are well on target. But there needs to be a market to flux, of course, it's tougher, but we are just in line with what we promised to the Board.

You have such a nice contribution from those extra volumes. So I can certainly understand what you alluded to. Then just looking at -- obviously, this was on the back of finalizing the integration work was a big CapEx here. What -- where do you see your CapEx coming in this year or maybe when you are back more to maintenance levels?

We expect the CapEx levels to decrease, but perhaps it will be another year with a slightly higher CapEx level, normal level. So it will definitely decrease, but it will perhaps take a couple of years before we reach a level which is in line with the depreciation level.

We will invest in the shops, as we said, to attract the small and medium-sized customers. That will be an investment we'll do going forward. That's for good reasons.

And in that shop investment, do you see an expansion of the network from the current structure? Or is it more, say, lifting the whole network to the sought-after level?

More of the latter. We have such a good footprint, of course, here and there, we could be opening a greenfield or potentially acquiring a company in a local market where we're not present that we have done and that we will do. But we also have some shops which are very small, not even to be really called shops, especially in Finland, where we have some 200 square meter shops. And that's from our perspective, it's not a shop. It's something else. So that we will continue to develop. So it's more to, as you said, to develop the existing ones and opening a lot of new ones.

Excellent. And the final one for me. Looking at your reasoning and discussion around the working capital, I take it that you are not trying to necessarily decrease the working capital compared to current volume. It's more of a question that you hope for generating more volume. So then working capital as a percentage of sales should decrease. Is that the right interpretation at this stage?

Yes.

Yes.

But we are -- off levels, we are focusing that, of course, if the volumes would grow heavily, then we could be on these levels once we -- when we now start to roll out the own brands and get those volumes running, the stock level must come down significantly.

Or at least that you generate more sales out of the same stock level. Or is that...

Or a combination of the 2 would be brilliant.

But is it a lot of, say, old shelf warmers that are still sitting there that you are not necessarily focusing on anymore or given the new kind of categories?

The biggest challenge we have, of course, when we all speak about the defined assortment, the Nordic assortment, of course, all the products which are not in the Nordic assortment needs to be handled. But there are different ways of selling them out. But of course, that journey will be -- we know what to do, but it will take some time. But it's more there. But we also started with the defined assortment. It's not so terrible. I think we made an analysis that it's already from day 1, 70% of our sales if you take Sweden for example. So it's already 70%. So it's not 10% and 90% needs to be sold out. It's already a big chunk. And then from there, we will tune it more and more and more and more until we are at the level we'd like to be.

Excellent. I noticed one final one. Looking at the restructuring, you start coming up the year, and I guess you have about SEK 100 million left of it. Is that just now for covering, say, unused facilities, lease payments for -- until the end of those contracts? Or are there any other big chunks in that?

Approximately SEK 80 million is related to that part and SEK 20 million is related to the assortments much.

[Operator Instructions] Dear speaker, there are no further questions at this time. I would now like to hand the conference over to our speaker, Clein Ullenvik for closing remarks.

Thank you very much. So thank you for listening in. We feel we are in a good place. We feel that we have proven that in 2022 we know what we are doing. We have delivered on what we have promised. We can make acquisitions. We can integrate them. We can integrate 2 fairly big businesses and come out alive in the other end. And we are in a very, very good position now for whatever the market potentially could throw at us, management team, which I'm happy to be ready for all necessary actions. We have a lot of fine-tuning still to do. So this journey continues. Thank you very much.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.