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

Good day, and thank you for standing by. Welcome to the Alligo Interim Report Q3 2023 Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Clein Ullenvik.

Okay, everybody. Welcome to Alligo Q3 report. My God, it feels like we just presented the Q2 report. Time flies. We are super happy to share with you what we've been up to this last quarter. And by we, I mean our 2 presenters today that is Irene Bellander, our CFO; and myself, Clein Ullenvik, CEO. As always, we try to bring up some things we'd like to highlight in the report, not the report in its entirety. And as you also know, we bring up some themes. We've had logistics. We've had assortment sustainability. We had acquisitions. We have a customer strategy. We have own brands. And today, we dive a little bit into brand consolidation and sales strategy. We hope you will enjoy it. So a little fly over. We are a leading player in work well case protection tools and supplies in the Nordics, rolling 12, some SEK 9.5 billion turnover, a little shy of 2,500 employees and 213 stores with our content brands TOOLS and Univern and gross, but more of that later on, as you know. Yes, we have managed to confuse a lot of people with all the changes in the group. We, as a group, we are fairly new as a named list even with our heritage dates back to 1832. So dooly was founded 60 years ago, TOOLS around the millennial shift, but at the later part, we managed to confuse people by the merger of TOOLS and as for dual, forming Alligo, spinning off the industrial park in 2022, which now is called Momentum Group as the group name was earlier on and today, we are Alligo. But even if the name is new, our heritage dates back quite some time. And as you know, we are Sweden dependent. More than half of our turnout comes from Sweden and even bigger share, if you look at the results. So EBITDA is 72% of our group results. And the share of own brands is steadily increasing, and we are now at 19%. We were at 33%, 34% in the old Sevilla Group. Then we merged and then we spun off or sold Gigant. So this is the share as it is today, and it's increasing. And there's no use of its own having a high share of own brands as possible if we can be competitive together with our strong suppliers and partners, that is, of course, easier, but we use it when we need to increase our competitiveness. And we're happy to see that it's working. We're using it as a weapon to win market shares and improve our profitability. And our market, we divided up in 6 customer segments, which makes us a little bit resilient to the downturns in specific segments, whereas we today, it's very obvious for us all that the construction sector is suffering mainly in Sweden. But then we have 7 other customer segments we are relying on. So the industrial side, the manufacturing side is showing fair stability. Public sector, transportation, storage, repair, maintenance, agriculture and then 2 segments, which, of course, is mostly focused in Norway, the fishing agriculture, aquaculture, and oil and gas. I would like to focus on small and medium-sized customers. We welcome all type of businesses, of course, and we need to run the bigger customers in a more efficient and professional way. But our main focus, as you know, is the small and medium-sized customers the company is built to serve them in the best possible way. And we have good competitors, different chains, the obvious players that we compete with on a daily basis. Some highlights. Business conditions. You've seen this slide a couple of times. It's a little bit updated, but things are developing more or less exactly as we have predicted. So the market development, we have foreseen that in Sweden. I look back at old comments we made a year ago, and we already saw signs then even if many thought we were a bit early signaling that, but it's developing just as we have predicted. We have strong demand in oil and gas in Norway, which is good. That gives us headroom in Norway to now invest into small and medium-sized customers to the construction sector, while they have a very nicely developing oil and gas sector. We have the management. We have been through this many times before. We run the company a little bit like a private equity company would run the business with a lot of initiatives, could be cost initiatives, could be growth initiatives. We are fine-tuning the sales, how we organize and manage our sales force constantly. We adjust our prices. Of course, we need to increase prices due to the worsening exchange rates within SEK and NOK, but we also need to take great responsibility for the concept we have and not price ourselves out of the market because our concept is very relevant, especially in these times we are in today. Inventories, we work constantly with fine-tuning that. And as you know, we are rolling out own brands in our shops, and that is tying up a lot of capital and we are fine-tuning that. And cost reductions, we'd like to do that as we follow the market development, not doing too much, too early or too little too late, but trying to do it at the speed of the development in the market. And so far, I think we've done it in a good way. Yes, delivery capacity is good. That is the synonym of saying that we have too high stocks, I guess, but it's good and stable. The logistics structure works well and we have good availability. And the macroeconomic factors you are well aware of, there are some turbulences in the world and the business climate is, to a certain extent, challenging. So Q3 in brief. Just looking at the assets reported, the revenue is flat. But if you look at it, it's in an organic way, it's minus 3%. But we're happy to say that we managed to increase the result by SEK 10 million, 6%, and we write up an EBITDA margin of 9%, so up from 8.5% to 9%. Cash flow is steadily improving as we are now focusing more and more on managing our stocks. We have now got the keys for the logistics centre in Vestby outside Oslo. We learned yesterday that we are now to 60% installed shelves and automated machines and whatever we need there. So it's running along nicely. We're making some changes in the sales organization, getting tighter control of the sales organization. So we have made a few changes. So they all celebrated its 60th birthday, and we made some buyback of shares. So brand consolidation, today's theme, and possibly, you have seen the press release that went out that we have now decided. I think we have communicated earlier on that we will go for TOOLS in Norway and Finland. And in Sweden, we have said that jury is still out, what is the most flat way to do it. But if we start from the right, so Finland, girls will merge into TOOLS. TOOLS is the strongest brand in Finland. So in Finland, we will be called TOOLS, except for all the nice businesses we have bought that will see when it suits and it was safe and best way to merge them into TOOLS and if ever, in a certain examples. Norway, we used to have even 3 brand lines that all existed in Norway, but that was closed earlier on, not the shops, but the brand. And now we've had Univern shops, and they are step-by-step being converted into TOOLS. Cabot TOOLS workwear. And in Sweden, we have now arrived at the conclusion that we will use the brand Swedol. So TOOLS and Grolls will move over under the old brand. And by having done that, we'd like to build this, as you know, the scalable platform have the same ERP system everywhere, have the same logistics structure everywhere, as few legal entities as possible and also, of course, not having too many concept brands because it's more cost efficient and effective in all ways to build brands in our local markets, not having too many of them. So this will increase our efficiency and making the sales management easier. Let's see then, we have ongoing actions, stores, how to attract small and medium-sized enterprises that we know how to do. We are refining how we run the sales in all our countries. And we need to learn from each other. We have a lot to learn how we drive marketing, how we, in the cannibal we drive customers to our shops, and we have got that started nicely. We are working more and more with marketing. I hope you can hear that on the radio and you can see that in the papers and in your local city, so we are pushing to be more visible. Some new locations, boarder opening, we have an outlet in non-Shapeng, where we try to sell and get rid of some slow-moving articles that we have done that in the past and has been very successful and a good way to do that. And then we are refurbishing existing stores. We talked about that last time, especially in Finland in relation to the country's size and the number of shops is perhaps the biggest investment in relative tons in Finland. Our large customers, we do have large customers. It's not the same strategic focus, but we need to handle them in the best possible way. So as you know, we have formed this role industry segment manager, and that's supporting the local sales organization. We have 1 half unique offering, which is our smart service solutions on-site storage, storage close to the workplace. And we believe that we have the best offering in the market from a technical perspective and from the whole setup of how you fill up these which increases the efficiency for our customers dramatically. And then, of course, the solutions, we have a lot of different solutions for. So financials, Irene.

Yes. Thank you. As Clein mentioned, we increased profit and improved cash flow during the quarter despite the weaker sales trend. Revenue was slightly ahead of last year, driven by completed applications and positive currency effects, but contracted by negative organic growth in Sweden and Finland and one trading day less. The slowdown that was observed in Sweden in the fourth quarter of last year, and in Finland during the second quarter of this year has continued and gradually intensified and applied to most customer segments. EBITA increased by 6% to SEK 191 million in the quarter, corresponding to an EBITDA margin of 9%. Norway drives the improvement in profit resulting from stable growth, improved margins and cost reductions. The effect is, to some extent, offset by weaker development in Finland. The gross margin improvement is mainly related to the increased share of sales of own brands and general sales and assortment management. These positive effects are to some extent, contracted by negative country net. During the quarter, we had a SEK 15 million debt release of the restructuring reserve. The amount is higher compared to previous quarters this year, following the finalization of the assortment match and prolonged sublease of the warehouse premises in Alligo. The financial net amounted to minus SEK 23 million, excluding IFRS 16 compared to minus SEK 10 million last year. The deteriorated financial MAP is related to higher seaborne but has, to some extent, been contracted by lower interest market due to improved leverage. Turning to next slide, and let's have a closer look at the development in each market. Revenue in Sweden decreased by 1.7%, and the organic growth was negative, but was mitigated by the acquisitions of fixed profile companies. The previously observed slowdown continued and intensified in the third quarter, and organic growth was approximately minus 6% and related to more customer segments. EBITA ended at SEK 138 million, which is slightly better than last year. And the focus going forward is on driving sales and the organizational change that Clein mentioned, with effect from September is a part of this. The positive sales trend in Norway in local currency continued in Q3 and was driven by the good market development in the oil and gas segment, and the organic growth reached about 2% in the quarter. The improvement in profit in Norway is driven by stable growth, improving margins and cost adjustments. And the priority going forward is to increase the share of small and midsized customers and strengthened sales and assortment management. When it comes to Finland, sales increased by 11.2%, stabled by acquisitions and FX effects. The organic growth was negative and the hesitating market noted in Q2, accelerated in Q3 and is related to most customer segments. The results in Finland was weakly due to investments in new and existing stores to better meet the needs of small and medium-sized customers. The third quarter is seasonally the weakest quarter from a cash flow perspective. In the third quarter, cash flow from operating activities amounted to SEK 34 million compared to minus SEK 91 million last year. The improvement of SEK 125 million is mainly related to a lower pace of inventory buildup and decreased prepayments to our 4 East owned brand suppliers. The higher inventory levels compared to last year are driven by our own brands and the ongoing assortment match and to some extent, also acquisitions. We are not satisfied with the high stock levels, and there will be increased focus going forward to improve capital efficiency. The investing activities for the 9 months are related to M&A activities and consists of fixed completed acquisitions with also store in central whereas reductions and IT-related investments. The ratio of CapEx to depreciation amounted to a multiple of SEK 1.5 million. And finally, the financing activities are mainly related to dividends paid, repurchase of shares, increased borrowings and amortization of limiting liabilities. Since the third quarter is the weakest quarter cash flow-wise, the net debt increased to SEK 1.8 billion at the end of the period, but is in line with September last year. The ratio of net debt to EBITDA amounted to a multiple of 2.0, which is a decrease compared to corresponding period last year and well within the financial target range. The unutilized credit facilities, including cash amounted to SEK 938 million. Our Covenants are related to interest coverage and equity asset ratio. And these are fulfilled at the end of the period and there is good headroom before reaching the threshold. So in summary, we have a strong financial position, and we will continue to invest in manganic growth and take advantage of potentially good M&A opportunities in our market. Let me hand over to you Clein, for some more...

Thank you, Irene. As you said, a summary on outlook. So with our 8 different customer segments, we have proven some resilience despite tough conditions in certain sectors. We continue to increase profitability and improve our cash flow. And all the initiatives we are driving is in line with that. The standard assortment that we talked about a lot. It's called the assortment. We've worked closely with our partner suppliers, which this is a very, very good thing for them, that we sell the defined assortment and not too wide assortment. If we can focus on fewer articles, then we have a better supply situation, we get better conditions, and we can fulfil all sustainability measures we have. Strengthen our competitiveness. We do that together with our suppliers, our partners. We reduced costs step-by-step, as we've said earlier, and we fine-tuned our sales organization, and we have a very good delivery capacity of external brands or own brands. So 3 overarching themes, we love to make things simple and to be able to communicate it to 500 employees in 213 locations. So except for a very clear strategy, we always have a number of overarching themes, and these 3 have been the same number quite a while. We usually have a fourth one, which was to finalize the integration of TOOLS and Swedol, but that since we have said is ready. So that is not an overarching theme anymore. But we have 3 of them make our people grow. That's what distinguish ourselves from our competitors. We have the best people of them all, we think, improved collaboration and processes. We are a reasonably new build company, as you know, and there's still a lot to do how we work together and the processes efficiency. We built this under a burning pandemic and haven't been able to meet during those times. So it will take a little bit longer to have this as fine-tuned as we would like. And then to get on track with growth and margins in all parts of our business. We cannot accept having certain entities of our wonderful group not performing and that we focus on them, and one tremendous change has been in Norway, which was not performing at this level at the beginning, and we worked closely with our Norwegian trends, and we can now see a very good development in Norway as one example. So then the million-dollar question, where is this heading, we all consume a lot of market statistics from our industry and adjacent industries. They all point in the same direction. It's not a surprise to us. It's developed as we predicted a year ago, and it's continuing to develop as we have predicted. But the important thing is that we feel we are well positioned even in a weaker market. We are focusing on sales. I cannot say that I see it yet. This opportunity. I know we have to take quite a lot of market shares in a slower market. Historically, it has been a very strong offering in tougher conditions. And I can see it partly, but not to the extent you can wish. We have a crystal-clear focus on small- and medium-sized customers. We work with inventory levels cost, as we said, and we will take the opportunity even in turbulent times to do acquisitions and do other type of investments. So with a strong financial position, as we have, we see great opportunities to improve our position in many areas. We have communicated earlier certain areas, we would like to be stronger in and we will do acquisitions in those areas to improve our position. So that is good. Very good. That's all from us handing back to you, Heidi, for questions.

[Operator Instructions] Your first question comes from the line of Karl-Johan Bonnevier from DNB Markets.

Just 2 questions for me that I see for the moment, at looking at gross margin, obviously, continued very good movement there. Do you still see, what I would call, say, purchase price inflation coming into your inventory? Or has that stabilized so that part of price compensation, if you put it like that, is normalizing from here looking at gross margins?

Yes, it is as the stock turns, and we are filling up with new purchases to a higher price. So inflation is one of the things we are fighting against when we do activities to bring down the stock. So it's good you mentioned that, Karl-Johan, because we are doing things which in real terms, in a number of things, it's having an effect, but it's being not visible, thanks to the inflation bringing up the value in money. So that will continue for quite some time. But we have a lot of different measures we are implementing to bring down the stock levels in units, so to speak.

And when you look at the day-to-day operation, you are still forced to implement price increases to compensate.

We can see that there were not that much price increases in the September increase that we got from our suppliers. We got it to a certain extent, but that was a fairly small increase. And we strategically also chose to be very careful. And as we even lowered the price for it a number of articles to be more competitive. So we tried to use the pricing process where we have and we historically have been very good at knowing where we need to be to be competitive. And as I've said it earlier, we could a quarter or 2, bring up the margins to a sky level, but then we will lose our competitive edge. So we are constantly balancing that. But we can see talking to our suppliers that they will most certainly have a price increase for the February price increase, if not for anything else, so due to the currency. So...

Yes, that's what I was alluding to because I think the currency environment has clearly not been favorable for you looking at both the Norwegian krone and the Swedish krona. So impressive work in that way, sir. And then just trying to pick a little more on your plans for, or your outlook for 2024. As you said, it's a million-dollar question. But when you look at your CEO reaching themes when the last part is get on track with growth and margins in all parts of the business. Are there certain parts of the business where you would be more inpatient of getting things done in '24? And then how would that be affected by, say, maybe how the business environment turns out?

We are lucky in a sense that we've been very selective making acquisitions. So looking back now at least one year into the slow downturn, we can see that all the acquisitions we have made, they are performing. So that has been good, check. We are finding the right acquisition targets and we're doing them, and we are integrating them in the best possible way. But other things is also to ensure that we do the things we agree on. So even if it's a good reasonably profitable unit, we need to have the same pace, all of us. So we had a big management team meeting with the top, top managers here a couple of weeks ago. We discussed that a lot to really get this execution. If we agree on Plan B, which we are through. And we are now partly into Plan C when it comes to cost reductions. But whatever we agree on, everybody goes home and actually execute on because otherwise, it will be difficult to run a shift like this. And we all agree on it, and everybody will do it. But there is no room for anybody to say that I'll wait a little with my initiatives. Hopefully, I don't need to do them. That is not the culture we live in. If we bring on something, you do it. So, so many aspects to that. And we are ready, and I can see the commitment from everybody. So I'm quite sure we will do that.

Excellent here. And finally, just looking at capital allocations. You obviously did some share buybacks in this quarter. Just to get your thinking here when it comes to both measuring share, or buying back your own shares, so to say, to attract acquisition, what are the different hurdles? And what kind of gearing level would you be, say, signed with managing this business as it is for the moment?

Honestly, it was a little bit of a can we do that. We always ask the general assembly for the mandate to do it. And then we said, let's do it. We need a board decision. We need to direct press releases, we need to do it together with the bank. It was not a gigantic one. So we tried it. We will use it, hopefully, for acquisitions where an acquisition target was to get paid by shares. But as you know, and we have talked about it earlier, Karl-Johan. It's also interesting, well, in the international financial environment to which extent everybody focuses on that Swedish companies especially needs to see buybacks as you said, as an option to making acquisitions for a more efficient capital allocation. So we really need to consider that in all cases. Now luckily, we see great opportunities to do acquisitions, and I'm quite confident that, that will be a good way of investing our hard-earned money, but we need to be better at and that we can learn from an international environment to actually see share buybacks as an option.

And looking at the current interest rate environment, have been managing the operation at the gearing level around 2%, 2.5%. Is that a good measure?

Yes. Yes. I mean as a found fact, the fact is that, that's 2.3%, or it's actually 1.954% -- do we even discuss you. We have 2 decimals, still having been started on a 2. But we are really, really focused on that. And that is still the level where we get a very competitive interest rates from our bank. As you know, that increases with the gearing, but it's a good level.

[Operator Instructions] And the next question comes from the line of Emanuel Jansson from Danske Banca.

Sorry, I had some technical issues here before. And sorry if I didn't catch all the questions asked before either. But I think we can start off looking at the gross margin, which you have been able to improve very well in this quarter. You're mentioning about price increases, but also decreases. Can you shed some light on where we still are able to expect price increases and decreases? I mean you have a large share of private labels in working class, for example.