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

Good day, and thank you for standing by. Welcome to the Alligo Interim Report Q1 2024 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. Please go ahead.

Okay, everybody, welcome to Alligo Q1 report 2024. This is super busy Thursday reporting-wise. So we will be more to the point than ever and we can also anticipate perhaps a little less live questions and perhaps a little bit more mail questions. Presenters today, as always, Irene Wisenborn Bellander, our Group CFO; and myself, Clein Ullenvik, CEO. As always, we are happy to present some highlights. We have one theme per quarter. As you know, we've had logistics assortment, sustainability, acquisition and so forth. At this time, we will present two things, one service in the clothing section and then our INNO within the fasteners, our little growth area, we can present those 2. So we hope you will enjoy this presentation. But before we get started, just a few things free from my heart because we're putting a quite a different quarter behind us where we could see the underlying market developing broadly in line with what we have seen for quite some time. It's 1.5 years since we first started communicating and guiding for tougher times ahead. And that continued into this first quarter of 2024 and we've been able to mitigate that in a nice way, we think so far. And looking at the different type of market statistics being available, we know we're doing a pretty good job. We are following a lot of different sectors of our market. Secondly, we have had a significant Easter effect. It's difficult to communicate, but you heard many other reporting companies relating to that. We had 1 trading day more in January, a small month. We had 1 trading day more in February, a small month and we had 3 trading days less in March, which is for us an important month in this quarter. In Norway was even 4 trading days less actually. So that was known. It was planned for us and, of course, we will have a similar positive effect in Q2. On top of those 2, we had a strike in Finland and that we didn't know about and we couldn't plan for. So from sometime second half of February until end of March, there was a big strike in Finland, which affected our biggest customer quite significantly. Some of them came to full stop and that's just a fact. And then on a personal note, I ended the quarter by poking myself in the eye with my own thumb. So I've had 2 eye surgeries based on that. So believe me when I say that I'm super happy we put this quarter behind us. But we do whatever we can to improve the position for the company. We have improved the gross margin. We are working, as you know, hard with cost and with manning. We've had great progress. We are in a very good position. It's the same company as Q4 last year, but in different circumstances this time, we will do acquisitions. We did 2 yesterday in Finland we are super proud of. So we are confident, but we are happy that we left this a little bit different quarter behind us. So should we get this show on the road. We said that we should not have too many slides presenting Alligo every time. I think you guys know it's pretty well since before, but SEK 9.3 billion turnover, a little shy of 2,500 employees, 210 stores. And what is new since some time back now is that we have decided on the concept brands, Tools in Finland, Tools in Norway and Swedol in Finland. So in [indiscernible] Sweden. So with our integrated model that takes away a lot of complexity from a marketing perspective and all type of -- from web shops and so forth. So it's an important thing for us to only have one concept brand per country. So some highlights, perhaps covered most of them in my little introduction, but the market continued to slow down in line with what we've seen for quite some time. So no drama there. Significant Easter effects and strike in Finland. Yes, that we had. But we are on top of things, reducing costs, adjusting prices. We've done it nicely so far. We even do not increase and even lower the prices in some sectors where it's very price-sensitive from a competitive point of view. We will continue to grow by acquisition. So when we find the suitable target and it fits into our strategy, we go for it and we will continue to do that work with developing our sales processes and reducing inventories. So we, as a company, are -- we are super stable. Logistics worked with a good set of assortment. Our shops works nicely. We have wonderful colleagues everywhere. So we, as a company, are in a very good position. But then there are some external factors that we can't really do much about. Business cycle will probably continue a little bit longer being slow. And then you have -- of course, you have this geopolitical turbulence. So we have to take our private brands, own brands not through the Suez channel that caused some, of course, extra time and some extra cost, but we are used to that, unfortunately. So the quarter in brief. Little over 5% down on revenue. And the cash flow, looking to the far right top is fully in line with the lower results. So the adjusted EBITA SEK 84 million compared to SEK 127 million same quarter last year. And EBITA margin 3.9% and the gross margin, which is stable, even a little bit up. So we continue to play our game. So we've opened some new stores in Boden and in Vastervik and one in Finland in Herttoniemi. So we continue to develop the business just according to what we said the whole time and according to our plans and it works well. The acquisitions, I mentioned combined turnover of EUR 15 million, 42 employees in 5 stores. And INNO, we will come back to shortly. So if you take our product brands, I was saying it was a terrible quarter and so many things we didn't like even including eye surgeries, but I managed to spend a week in Mainland China during the quarter, which was super positive on the other side, meeting our wonderful factories there producing our Bjornklader, Univern, Gesto and 1832 brands, that makes me super proud seeing what our colleagues have done over so many years, building relationships and developing together with our partners in China. So we have Bjornklader, Univern, Gesto super strong balancing gloves and 1832 for more corporate branded clothing. Tool Supply, we have AmPro, AWARD, Nima for use for more consumable items and then to the far down right corner INNO, which is our new brand in fasteners for industrial use. And if you look at this circle, you see the PPE being the biggest cloth and tools and they have 3 smaller areas, which all of them are growth initiatives for us. One is work [Technical Difficulty] we've said many times, they would see a great need to grow. We have many industrial customers who does not buy their workplace equipment for us. It's a growth opportunity. Then we have the fasteners, which we are not super small in fasteners, but we can be much bigger. So that's a growth area. And then the last little chunk before other is welding and industry components. And the welding, as you know, is also a very focused area for us having done a number of acquisitions. So we are taking a leading role in consolidating the welding market in the Nordics. So those 3 are, for us, very important growth areas. So INNO, it's a full range, industrial fasteners. It's available in bulk and it will be available through bars -- fastener bars in our shops. So we will improve our profitability. We will improve our competitiveness, having this INNO and it's also good to have something we can fully control ourselves. So it's being launched as we speak in Finland and it will continue to be launched in Norway and Sweden after summer. This will, of course, have some effect on our inventories because we are now launching a new assortment. We're taking home products to launch into our shops and to other distribution channels. Smartwear is also a very good thing and also from a sustainability point of view, where we do a customer together decide what type of assortment they should need for the type of jobs they are doing. And then we include that into a full circular model with washing, repairing, recycling. So we have an external partner helping us with the recycling part. And to a great extent, already, we have many products being made from recycled materials. So we can be a true and one of the absolutely first offering a true circular offer in workwear. So for the customer to see on a nice dashboard savings in money and improved factors from a sustainability point of view. So it's also being launched as we speak. We have one bigger customer already and we're having discussions with [Technical Difficulty] we are very interested in following the development there. So financials, Irene?

Yes, thank you. As Clein mentioned, the slowdown in demand on the market continued as expected. Revenue decreased by 5.2% in the quarter. Acquisitions had a positive impact of 3.3%, but were unable to compensate for negative organic growth of 6.3% related to all our 3 markets, a negative calendar effect or Easter effect primarily affecting Norway and on top of that, the union strike in Finland. The Easter and union strike impact on sales has been estimated to approximately SEK 75 million and corresponding SEK 25 million on the results. EBITA reached SEK 84 million compared to SEK 127 million last year. The result was weaker in all markets, but primarily in Norway and Finland. EBITA margin reached 3.9% and the decreased profitability is a result of lower volumes was mitigated by improved gross margins and cost-cutting measures. The cost savings are mainly related to the reduction of personnel costs. Excluding acquisitions, the annual salary increases have been offset by a reduced workforce. If we turn to the next slide, there are some illustration of parameters affecting the trading gross margin. And the gross margin improvement that we have seen in the quarter is mainly related to the increased share of our standard assortment, including our own brands, but also the increased share of small and medium-sized customers, while an unfavorable customer segment mix contract. Looking into customer segments, the largest drop in sales in Sweden is within construction. And in Norway, oil and gas is the most resilient customer segment and these affects such margins. On the other hand, we have a favorable customer segment mix in Finland, where the largest drop in sales is related to manufacturing. If we move on to look at the development of each market, we can see that sales in Sweden decreased by 2.2%. Organic growth was negative, but mitigated by the acquisitions of 2 welding companies and 1 product media company. The previously observed slowdown continued in the quarter. Organic growth was approximately minus 5% just for 2023 and the decrease relates to most customer segments. Sales in Norway decreased by approximately 7% and the organic growth was negative at 4% and significantly affected by Easter and FX. The slowdown in the market is related to all customer segments, except for oil and gas. In Finland sales decreased by 10.5%, including 2 acquisitions. The organic growth was negative at 15% and a clear slowdown in the manufacturing industry in Q4 continued and union strike and Easter effectively enforced that effect. If we move on to cash flow, we had operating cash flow of SEK 128 million in Q1. That is slightly behind Q1 last year due to lower EBITDA. We are still focusing on reducing our inventory levels with new stores, investments in our own brands and the launch of a fastening assortment will imply an inventory buildup in the short-term. Investing activities are mainly related to M&A activities of SEK 124 million and consists of 3 completed acquisitions, but also investments in noncurrent assets of in total of SEK 34 million. Investments are mainly related to further development of our e-commerce solutions, our onsite service concepts and new store establishments. And the ratio of CapEx to depreciation amounted to a multiple of 1.1, which is almost in line with our long-term target level of having depreciation in line with CapEx. Finally, the financing activities are related to increased borrowings and amortization of leasing liabilities.

Why do we have so much in cash, Irene?

Yes, we plan to do some more acquisitions. Good question. Yes, the net debt [ frequency ] amounted to SEK 1.6 billion at the end of the period and the ratio of net debt-to-EBITDA amounted to a multiple of 1.8, which is slightly -- which is in line with last year and well within the financial target range. Unutilized credit facilities in cash amounted to SEK 1.1 billion. And as we have said, you can see the cash amount is on a high level and we have a good acquisition pipeline besides the 2 acquisitions that we made yesterday. Our covenants are related to interest coverage and equity asset ratio and these are fulfilled at the end of the period and there's still headroom before reaching the threshold. So in sum, we have a strong financial position and we will continue to invest in organic growth and take advantage of good M&A opportunities in our market.

Very good. So if we move to summary and outlook in this high-speed presentation. So we are in a very stable position in a continuously challenging market, which we've been able to predict in a good way and to the greatest extent mitigate so far in this quarter then, of course, Easter and strike effects from Finland, but I don't need to say that anymore. We continue to strengthen our competitiveness through adjusting prices in a clever way, work even closer with our wonderful partners and suppliers. We developed our sales activities step by step. We hope you will soon hear much more marketing from us. And we are deadly dedicated to improve the customer mix. So everything is stable, everything is in order and we have a good delivery capacity. And the outlook for 2024, well positioned. We do whatever we can and we will capitalize on our own brands to take market shares and to grow. And we are also aiming to step climate targets in line with SBTi that we've already communicated. So that's all for now. Handing it back to you, Heidi.

[Operator Instructions] Your first question comes from the line of Emanuel Jansson from Danske Bank.

So indeed, a lot of reports after today and sorry if I'm answering questions which more or less already been answered. But looking at your performance here in Q1, we can see that the gross margin improves and remains strong. I think you're also increasing the share of private labels and also increasing in a very profitable area of -- within workwear, et cetera. And it feels that you are a very well-managed company, so to say, with both you and -- you, Clein and Irene with a great experience from this industry. So my question for you here, Clein, is what could potentially make you more concerned about not increasing profits in 2024? Now leaving Q1 behind that, what could surprise us potentially here going forward? Because otherwise, underlying, it seems that you are developing fairly well, so to say.

It's a good summary that we think we're progressing with whatever we have said we should address. And unfortunately, the market is not helping us much. So besides a general upturn in the market, I mean the inflation challenges we had not that far ago, it's not there anymore, not in our assortment at least. I hear it in other adjacent assortment, it could still be an inflation higher price increase pressure. We don't see that. We have a very small, not to say more or less none, price increases coming in. So that is taking out to the equation at the moment. All the disturbances in the world, we think so far, we can mitigate that in a nice way. We have to go around the Suez Canal as it costs a little bit and takes a little bit extra time pushing the inventory a little bit up. But besides that, what is known so far, it's nothing that should affect us and we have a good set of warehouses. We have a good integrated model. So no other threats as such. For us, the challenge now and a brutal focus for all of us is to push even harder on sales. Of course, we had a couple of years, even if we think we've been reasonably good, of course, we've been to a certain extent inwards looking with all the changes we've done, ERP changes and logistic changes and assortment changes and merging 2 fairly big companies have taken a lot of time and efforts. So for us to really get the energy out and do that together with everybody in the company because everybody is a part of this chain delivering to our customers. So I think we are in a good position, although the market is terrible partly in this quarter, hitting us hard with a couple of other effects that we didn't want to. So we feel confident. We have super confidence going forward.

Yes, okay, cool. And could you maybe -- also maybe elaborate a bit on the difference you see in demand versus small, medium customers versus your larger customers out there, yes, both within the construction, also maybe the industry as a whole?

Good question, because we have an unfavorable mix at the moment. I mean we would love if all our customers have an increased engagement together with us. But the smaller ones are suffering more. And the top line drop is not so dramatic, but it's also we're having the largest -- we have some growth industries in our countries where we are a supplier to them and they grow a lot. And normally, the bigger the customer, the lower the margin. So we have a bit of an unfavorable mix, but that doesn't change our strategic direction that we need to increase the share of small and medium-sized customers. So the marketing I mentioned briefly, which you will see and hear much more about from starting soon is aimed at increasing that share because we have our shops. We have the assortment. We have these wonderful colleagues out in the shops serving those customers. And we are super ready and we need to increase the traffic to our shop -- shops in all our countries.

Yes. And do you see any slightly, like indication in this segment of small, medium customers that is turning to a -- yes, starting to turn somewhat at least here in Sweden or in Norway or in Finland or how can you describe it?

As said we would consume all available market statistics. And if you look at Norway, the market statistics actually has indicated some improvement. It should have been on its lowest level as it looked at the figures we can watch now. Then we talk to more or less all salespersons daily. And of course, some of them feel that we are getting quicker responses to quotations made. And I don't know if they -- I only hear that because they want to be kind or not. It doesn't feel it has changed a lot, but we are hopeful. Interest rates, hopefully, starting to come down, I mean, it sounds why should that affect so much in the short-term by just changing the mind of people and being little bit more optimistic should help us going forward. So -- and I said it so many times, and it's not a signal that everything is super growing from now, but every quarter we put behind us is one step closer to a market upturn. So we continue to focus on what we can and we hope that we'll soon see some changes.

Yes. Yes. And I don't know, at least here in Sweden, it's been pretty cold weather, I don't know, could that maybe affect the start of Q2 somewhat or...

Thank you, Emanuel. You're so brilliant in helping us communicating it. You know the company is exactly that. I didn't want to even to bring that up. But of course, it's not -- we are having these [indiscernible] Swedol days and Tool days right now and to sell a high-pressure equipment for cleaning your outdoors and selling shorts, of course, we'd like it to be cold and snowy in the beginning of the winter and we'd like it to be warm and live in the beginning of the spring. So yes, thank you very much.

Your next question comes from the line of Karl-Johan Bonnevier from DNB Markets.

Thank you very much for the bridge that you gave us on looking at what you think the Easter and the Finnish strike meant for the quarter. But if you look at that, would you consider that now being what we call lost business, or do you see some of that impact coming back in, say, favorable April?

If you look at the Easter effect, it should be. Everything else alike, it should be just shifted from Q1 to Q2. We are shooting at a moving target. Hopefully, we don't have any strikes and it's not any strike in Finland at the moment. We don't have any Easter effects in Q2 as we had last year. On the other hand, we have the underlying market, which we don't see has turned up yet. And -- but we, at the same time say we are pretty good at so far, at least, mitigating. So we should -- it should be more or less a shift between the 2 quarters, yes.

Good to hear, good to hear. And when you talk about the strong acquisition pipeline, how do you -- is it possible to quantify? Do you see opportunities to maybe get up to the same acquisition volumes that we saw in '22, '23? I see that your main competitor Ahlsell has been very active in the market at the start of the year. So has it meant that you've lost business opportunities that you would really like to go for with them being more active?

You are very insightful, a couple of irritating acquisitions from those guys and girls. We have plenty of acquisition candidates and the 2 nicest one, at least from my personal favorite, we arrived at yesterday, yes, we communicated the super well-run businesses are good customer structure and also big supplies to the defense industry and in good -- those are exactly the type of acquisitions we'd like to make. And we have a big pipeline. Sometimes we are more in a catch-up phase than Ahlsell and now they have been launching a couple of them. But it's -- no, it's good with good competitors. It keeps us both on our toes, I guess. So it's -- no, no, we have many cases to continue to pursue.

And if you try to go or get in a time perspective, say, if you compare the pipeline you had -- might have had for 6 months or 2 or 3 quarters ago to how it looks today, how would you see it measures up?

Yes, it's better. It's better companies. We have found our growth sectors. They are much more clear for us internally and when we talk to the Board and the management team, it's also fun to say that we looked at that at yesterday's Board meeting that it's actually the growth areas we have identified are also those being most resilient in this difficult market, which is partly perhaps luck and partly perhaps we have done something good, but it's good to see. So that gives us even more hopes that we are on to something good. So we will continue to push. So it's better is a quick answer.

Good, good. And when -- you mentioned the unfavorable customer mix for the moment with obviously the smaller guys fearing worse maybe than the larger midsized customers in the backlog. Has it meant any change to your bad debt situation or the way you reserve for, say, outstanding debt?

No, strangely enough, we -- when we entered into this some -- soon 2 years ago, we expected more of that. And it's so far touch all woods possible, it hasn't materialized yet. So it's strange. Perhaps we are too strict when we allow customers to come into our family. I don't know, but so far, so good.

And just also a couple of questions on the own brands that you're presenting. Looking at the INNO that you now launched, how do you try to position that in the market, the price points and yes, maybe compared to, say, the highest quality products, lowest quality products or whatever, so?

It's a super good question. And it's -- that is -- that takes some intelligence to do that in a good way. Of course, we get a competitive advantage, but we'd like to use that competitiveness, of course, where it makes use, not just lowering the market price. So we have a pretty good idea of how to do that. But if you're on to something extremely important that it needs to be very, very well-managed and done with sourcing and hand-in-hand with the sales organization and do it in a very controlled manner. So we are very much on top of that. We don't want to end up having created higher inventories and a lot of internal hassle just to sell just as many as we did before, but at a lower price point than we had, then we would have done something really, really bad. So -- but it's a -- yes, it needs to be handled carefully.

So if you try to describe it, would it be a value price point in the professional segment, or how would you describe it?

Yes, quality-wise it's exactly the same as any other brand, but you get an increased interest if it's your own brand. Of course, it's more interesting for our sales organization to talk about own brands. So you normally get an increased focus, just having a known brand. But it's a little bit of a different, more modern shelf -- shelving system in the shops. So we actually think we are with our own brand developing that part of the market a little bit. So it's not just taking in lower price, lower quality, it's exactly the same quality at least, but potentially at a little bit lower price point out in the market and with better competitiveness for us. So it's a win-win-win.

Excellent. And maybe just a couple of words on how you see the own brand opportunity in welding. I understood that that's the segment where most clients look for the big professional brands and step with those brands. So how do you develop a known brand there?

No, the welding as such, it's not -- there is more developing the welding offer. So we've been made -- there we've been successful with acquiring welding companies, building a welding group within our company and try to make them to cooperate and carving out the best assortment possible. But you can have own brands on grinding products, drilling products, everything around that. And when you have a welding customer, then you also can sell the workwear to that customer and other welding equipments that we already have in the assortment. So for us, welding is important too to get closer contact with the customer. We are closer to the customer's process. And then we have so many different product areas when we have that relationship with the customer that we can also sell to the customer. That's the brilliance of the welding offer that we are developing.

There are no further questions from the phone lines. I shall hand back to Clein Ullenvik for webcast questions.

Yes. And we had, as we predicted very many. I take them a little bit just as they came in. Can you indicate price multiple to be paid for Finnish acquisition, which according to the accounts had a combined EBIT of 1.56 something. Yes, we've said earlier, we've generally spoken, not disclosing too much. We think that Finland is an interesting to do acquisitions in. There are profitable companies reasonably valued. So we happily acquire companies in Finland and the multiples, it's exactly the same for us as for any other players, if you're a serial acquirer or whatever you are, but it could be 6, it could be 7x profit, depending a little bit how strategically important it is to us. So we are -- it's not -- we're not paying up a lot. So Finland is a very good place to do acquisitions. Then there are a number of questions related to fasteners. If I could mention any top brand, which we have today and that is quite obvious, it's no secret that we have Arvid Nilsson is our partner in fasteners. That is no surprise. Supply are you able to leverage from your size? Yes, normally with our -- the question is, if we -- with our size, can leverage and another question is asked from a fastener perspective, but it's valid for all assortments with our, perhaps a little bit different approach on how we do sourcing is that we actually select the partners we want to work with. So -- and then that is a real win-win. The ones we'd like to work with and wants to work with us, we together have a tremendously good development and we believe we have good conditions for those. And the ones we work closest with, we call partner supplies and there are some 35 of them. And then you work in super close cooperation. And we actually even closed the doors to the ones who didn't win the tender to supply through us. So that gives -- yes, it's obvious for our partners that if you're in, you're in, if you're out, you're not selling through us and we think it's a more fair and a better approach. And there are others having more of a, you are welcome into the family, now you can use us as a platform for selling your products. Our approach is a little bit different. How is the typical impact on sales from adjustments in your customers work for post -- okay, it's a good question and I had that discussion with a colleague from the industry. If -- I interpret this question as if suddenly there were to be employed a lot more people, will that automatically lead to a lot of more workwear and tools. And yes, we have never looked at that as much, but I know others talk about that a lot. And of course, if they have more employees, then of course, they need more gears. We have, from a general perspective, more looked at the GDP development. That has been something we correlate with. If the GDP development is good and going up, then we normally trade up. But of course, number of employees in our customer segments is affecting us. Very good B2B share versus consumer, then consumer part is more or less non-existing. I mean what today's consumers could potentially be if there's somebody in our shops and they themselves don't even know if they are there as a consumer or a -- they have -- running a small business and you invest with all our tool shop and you're making purchases or something and it could even be that you don't even know yourself, am I there as a private person or am I there as a someone running a company. That was that page. No, and anything else there, Annica?. And we have some other things, let's see if we covered that in the presentation. One may -- is Alligo any different as a company in Q1 2024 compared to Q4 2023? No, if anything, we are a better company. About other factors that influence our performance, no, I think we covered that. It's a little bit of Easter effect. I think everybody is cheering in a nice way. So what do you say, Heidi? Should I go for some closing remarks?

Yes, there are no further questions from the phone lines either.

Very good. So then let's just say thank you for listening in. Today is a busy Thursday. We are happy we have left this quarter behind us. Let's bring it on for the rest of the year. We think we are progressing with what we have said we should do and fix. We have a great self-confidence and we know what we're capable of. Our model is clear, our direction is clear, so let's just keep on doing what we've always done. We've said we are ready to do more acquisitions. Irene has a lot of cash ready and we launched 2 acquisitions yesterday. We intend to do more only if they are the right ones at the right price. And as I said, each quarter we can put behind us is one quarter closer to, hopefully, a market upturn. So thank you very much, everybody, for listening in. The journey continues.

This concludes today's conference call. Thank you for participating. You may now disconnect.