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

Good day, and thank you for standing by. Welcome to the Alligo Interim Report Q2 2024 Webcast. [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, Alligo's CEO. Please go ahead.

Okay, everybody. Welcome to Alligo Q2 report 2024. As always, our presenters today is Irene -- are Irene Wisenborn Bellander, our CFO; and myself, Clein. And we many times say that it feels that time flies so quickly that we do not do much more than having the quarterly presentations. But it's starting to feel that we would like time to fly even faster into a time when the market is picking up quicker than we can see today. So sometimes you like the time to fly a little bit faster. We made jokes earlier that we could present any of the old quarterly reports because the situation is very much the same. The market is still slow. We are taking actions on whatever we can take actions. We are running cost reduction programs. We reduced some SEK 100 million so far. We are running capital reduction programs. We are maintaining our margins. We're running all different types of sales initiatives. So we could have taken more or less any of the last 2, 3, 4 quarterly reports and the story would have been the same more or less. We have one big challenge, that is that we have a mix effect, which is quite severe where industry segment customers are growing, the larger customers are growing, and our beloved small- and medium-sized customers are struggling. So that we are focusing on, and it will come back, it's not there yet. But there is one change compared to the old reports is that we have now hit the throttle concerning acquisitions. So as you could see, we have made 7 acquisitions during the quarter to compare with the 6 acquisitions for the whole of 2023. So we see good opportunities to do good acquisitions at a reasonable price point for well-run businesses. The agenda for today you can see, and we are going to do the same thing as we always do, bringing up some highlights. We're not going to go through the report in its entirety. There are many companies reporting today and tomorrow, so we will keep the speed up. We always have a theme. We have logistics, assortment, sustainability, acquisitions, customer strategy and so forth. Today it will be one theme, which is 2 slides on purchasing. But Alligo, only one slide, you know it. We have been struggling to get about SEK 10 billion. As I said, the market has not been helping us much. I would have hoped that we by now would have been above SEK 10 billion, but not yet. [Audio Gap] 2,443 employees and 210 stores. And looking at the stores, it's also a little -- illustrates something. We said that we were surprised how well we could mitigate a slower market in 2023 by reducing costs and, of course, that it would then be easier if we had 2,443 employees at the same place and continued to reduce, but we are spread out in different central warehouses and in 210 stores. So it's not as easy now when we look at plan F in cost reductions. We have done B, C, D, E. It's difficult to continue to cut costs, at least employee-related cost, in direct proportion. And we don't want to ruin anything, we want to be prepared for the market upturn. So just as a little comment. And the main brands we have, as you know, is Swedol in Sweden, TOOLS in Norway and in Finland. We can go into business conditions. During the quarter, continued weak market, especially for the construction sector, especially for the small- and medium-sized customers. There's a stable demand in oil and gas in Norway. I think we, as a management team, do whatever is possible to do, running different sales initiatives. We do acquisitions. We run cost reduction initiatives. We try to fine-tune. As you know, we have talked about that earlier, to find the right price point for different assortments to continue to be relevant for the small- and medium-sized customers. We don't want them to move to other suppliers because of price. So we have actually lowered the price in certain areas and tried to compensate by increasing prices in other product areas. And we constantly reduce our inventories, and we will continue to do that. We have a good delivery capacity. We've had some disturbances in the quarter starting up the Vestby central warehouse. We've merged the 2 warehouses we had to one location outside Oslo in Vestby. And there is some extra cost related to that and some delivery disturbances as many times when you do those type of things. And the macroeconomic factors, I don't need to mention, I think you know them better than I do. So in brief, not stealing your thunder, Irene, but the revenue, some 1.8% up, but organically, it's 3.2% down. And the 1.8% up is more or less that extra day we had in this quarter. You remember we had a negative Easter effect in Q1 with less trading days, and now we have one day back in this quarter. So if you adjust for that, it's flat. It's probably 0 in growth. Operating cash flow, a little shy of last year fully explained by the lower EBITA, and adjusted EBITA margin down from 8.4% to 6.8%. But we continue to navigate, we think, nicely in the customer segments and then keeping the margins up because that is something we can affect, and we try to do that, and I think we've done okay so far. So highlights. As I said, 7 acquisitions totaling some SEK 300 million in annual turnover. What is specifically fun is that 2 of them were welding companies. We have taken a grip of consolidating the welding market in Sweden and in the Nordics, but especially in Sweden. So those 5 welding companies total some SEK 250 million in sales, and by that, they are approximately doubling the welding sales that we had in the old Alligo before these acquisitions. The warehouse merge in Norway, as I've talked about, and had some startup costs. We are looking forward to the east -- to the autumn where we're going to launch the Smartwear. It's a clothing brand with a little lower price point, a little less features on it compared to our stronger brands that we have -- and that's 1832, sorry, and Smartwear is the laundry and sewing concept that will be rolled out. We will also be launching other brands, [ Proweld ], for example, for hand tools at a little bit lower price point to be more relevant for the small- and medium-sized customers. So it's not the sales of the product as such that is going to change the world, it's the perception of Swedol and TOOLS having a product in a certain price range that will be the big thing. So 2 slides on purchasing, as we said, and you know how we run this. We are very centralistic. We set the assortment, we select the supplies we'd like to work with where they do tendering, and we get, we think, pretty decent conditions. So by doing that, we can ensure that we have the right offering and what need -- we'd meet whatever the customers' needs could be. And working closely with the suppliers, it's also a way for us to arrive at a decent stock level going forward. We have the best control over the flow. We get better negotiation powers, and we can take better responsibility throughout the whole sourcing change -- chain. So since we [ started ] this journey with the merger, we are half as many suppliers, and we have some 65% less articles. So looking at the old Swedol and old TOOLS, all those articles, that has been cut dramatically, and we will continue down that line. So responsible sourcing, I think I mentioned it before, but it's fun. I was in China some couple of months ago, and I'm so super impressed by what our colleagues have been doing for 10 years and see the partnership we have with the factories there. So we have together developed -- 10 years ago, one of our colleagues went to Tangshan, for example, to one plant. We didn't produce anything there, and the journey started. We started with simple products like trousers, and now they are on the more advanced products like winter jackets and overalls. We represent 70% of their turnover, and they are running a very professional business with high sustainability targets, and to see how they contribute to the local communities is super impressive. So it's interesting to see. I visited, as one example, the 1832 plant in Wuhan, and it's also nice to see where actually our products are being produced. So super impressive what our colleagues have been doing for a decade in different countries, China, Laos, Bangladesh, Pakistan and so forth, and we have just started that journey. So Irene, some financials?

Yes. Thank you. As Clein mentioned, the slowdown in market demand continued as expected and mainly affected small and midsized businesses. Revenue increased by 1.8% in the quarter, and this was mainly due to a positive calendar effect from Easter in Q1, particularly in Norway. Acquisition had a positive impact of 3.1%, which couldn't compensate for negative organic growth of 3.2% related to Sweden and Finland. The negative organic growth has been consistent at around 5% in Sweden since Q3 last year and about 12% in Finland since Q4 last year. EBITA reached SEK 166 million compared to SEK 201 million last year, and the result was weaker in all markets, but primarily in Sweden, which has the largest share of SMEs. The EBITA margin reached 6.8%, and the decreased profitability resulted from weaker demand and pressure on margins driven by negative customer segments and price/mix, partly mitigated by cost cutting measures. The cost savings amount to around SEK 100 million annually and are primarily related to personnel expenses. On this slide, you can see how different parameters affect the trading gross margin. We continue increasing the share of sales related to our standard assortment in each market, and that positively affects margin. However, due to the significant unfavorable customer segment and price/mix, there is contribution margin pressure in Sweden and Norway. However, we uphold our margins on Sweden's relatively more profitable small and midsized customers. And if we look into the customer segment, the most significant drop in sales in Sweden is within the construction customer segment, and in Norway, the oil and gas segment continues to develop well, and both of these effects hurt our margins. On the other hand, we have a favorable customer segment mix in Finland where the most significant drop in sales related to manufacturing. Sales in Sweden were in line with last year. Organic growth was negative at around minus 6%, contracted by one additional trading day and acquisitions. The weak organic growth primarily affected the SMEs, while some larger customers such as those in the [indiscernible] and energy industry had a positive sales trend. EBITA ended at SEK 129 million, which is behind Q2 last year, and the weaker result is due to weak volumes and margin pressure following the negative customer segment and price/mix, while cost savings somewhat mitigated such. When it comes to Norway, sales increased by 12.4%, and there was rebound following the Easter holiday in Q1. Organic growth reached 8% driven by continued strong market in the oil and gas customer segment. EBITA decreased from SEK 29 million to SEK 26 million, and the weaker results related to margin pressure due to an increased share of sales within oil and gas with relatively lower profitability in addition to startup costs in the logistics center in Vestby. When it comes to Finland, sales decreased by 7.4%, including acquisitions, and the clear slowdown in the manufacturing industry in Q4 continued, and the organic growth was negative at 12%. When it comes to operating cash flow, it amounted to SEK 270 million in Q4 (sic) [ Q2 ], which is slightly behind Q2 last year due to lower EBITA and increased trade receivables. The increased trade receivables is due to high share of larger industrial customers with longer payment terms, and the inventory levels actually decreased in Q2. The first 6 months investing activities are mainly related to M&A activities of SEK 185 million focusing on 6 completed acquisitions and also investments in noncurrent assets of SEK 61 million. The CapEx to depreciation ratio amounted to a multiple of 0.9, which aligns with our long-term target level. And finally, the financing activities are related to increased borrowings, amortizations, leasing liabilities and EBITA. Net debt at the end of the period was SEK 1.7 billion, an increase from last year due to 7 completed acquisitions, increased dividend payments and decreased operating cash flow. Ratio of net debt to EBITA was a multiple of 2.0, which is higher than last year, but well within the financial target range. Unutilized credit facilities, including cash, amounted to SEK 1.2 billion. And as you know, our covenants relating to coverage and equity asset ratios have less headroom before reaching those thresholds. So in summary, we have a solid financial position, and we will continue to invest in organic growth and take advantage of good M&A opportunities in the market. Handing it over to you.

Thank you. Didn't we conclude yesterday at the Board meeting that the debt ratio would have been 1.9 if we adjust for the increased dividend?

Exactly.

So it's not that we have fiddled away a lot of money. We also increased the dividend, and by that, it made [indiscernible] also on the debt ratio, just as a little fun fact. So summary and outlook in this hyperspeed presentation. So it was an acquisition-intense quarter, as we said, and we will continue to do acquisitions. We think we have a very nice platform to dock on. We think the other areas to step into could be potential new growth sectors, so we will continue to do acquisitions. And we are focusing our sales assortment management, workwear, especially. We are almost unbeatable when we get our ducks in a row in our workwear offer. We do constantly price adjustments to be relevant, not being perceived as too expensive, so coming back to a smarter pricing that we used to have back in the days. Work closer with our suppliers. We have a good history of doing that with competent sales and running these different sales campaigns. And we will continue with our logistics structure with having one central warehouse per country. And we have a good delivery capacity. So we are well positioned. We are ready. We will be even more ready when the market returns. We will do that from a lower cost base. We'll do that with even higher sense of urgency to make success. We made a lot of plans before the vacation period to be able to hit the floor running in the autumn. So even if we don't foresee that the market will turn up crazily in August, September, but we will do whatever is possible for us in the existing market at least, that you can be sure of. And then our own brands, the ones we have and the new ones we will launch, will contribute nicely, and we are aiming to set the climate targets in line with the SBTi. So very good. That's all from this presentation. What do you say, Melanie, should we head to Q&A?

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

I just have a few questions here from my side. I think we can start off with the customer or channel mix and the gross margin. As you mentioned, it's been quite a challenging customer mix for you in the recent quarters. I think that you are still able to maintain a healthy gross margin. And I wonder if it's possible somehow to maybe quantify the effect in this quarter from this customer or channel mix.

I look at Irene, it's probably a little bit difficult. What we manage is we will look at the contribution margin, gross margin per customer segment. And I understand what you are aiming for. It's a very, very good question. Is it possible to quantify?

There are so many parameters going in different directions. So some of the parameters are going in the right direction, and yes, that's the share of the standard assortment. We have a positive effect from that. But in this quarter, the impact from the decreased share of small- and medium-sized customers heavily affects the gross margin.

But it would be interesting to see. We bring it with us, Emanuel. To say everything else alike, the quarter before compared with the present quarter, what is the exact mix effect, everything else alike. That is actually a good point, we take it with us.

Perfect. I totally understand it's quite hard to quantify, but okay. Then moving onwards to maybe on the same theme with small, medium enterprises and also with the larger customers. But I wonder, can you maybe mention something positive that you have gained from large customers the last couple of quarters? Have you gotten closer to these kind of customers? And have more of these customers chosen your own brands than you previously thought they will be able to be and yes, et cetera?

All right. If we talk about the larger customers, we have a huge ongoing activity lift, as you said, to convert them from whatever they have, and 1832 will be one tool to do that. So even if you buy our own brands today, to be able to offer them at a little bit lower price point, the 1832 instead of Univern and Gesto, will bring up the margins for us and be beneficial for our customers. That's a lovely mix. Then it's always the assortment management and trying to get the customers to buy for us the right assortment, but still meeting their needs. So that is a huge job that our key account team is running constantly and will continue to do as well as with the price -- general price negotiations, of course. So if you talk about the larger customers, there is a huge ongoing activity lift to convert them to other assortment and brands and also services. We have the smart services that will tie them closer to us. The Smartwear will keep them closer to us and with an increased margin. So we have a good set of tools to achieve that.

And do you perhaps think that you have a maybe better relationship with these customers today before, like, we saw the market starting to slow down because you maybe have been forced to improve your relationship with these kind of customers and you're maybe further ahead in this plan?

Absolutely potentially, and it's not that long ago that we threw 2 fairly big companies up in the air. And even if we like to tell you that everything went super smoothly, of course, there were disturbances, and there were smaller and larger customers saying that, you were not the best supplier during that period. Today we are back on track, and we are a very good partner to our customers. So you are on to something there. We start from a totally different position now, and our offer is very relevant. But some larger customers, they are only focusing on price, and then we need to stick to our game and say then perhaps, they are not the customers for us, and they should have other suppliers. But as long as they want to work effectively with the suppliers, I think we have in our assortment the strongest offer in the market at the moment.

Perfect. That's clear. And maybe what you think that we should expect here entering the second half of 2024? I mean, of course, you implemented a lot of cost saving programs as well. But I think also looking at some OpEx spend here, we can see that you have maybe increases somewhat the last 2 quarters year-over-year. Do you think it's -- is it possible to drive organic sales growth without having the market with you, I mean, mainly by gaining market shares because you have a lot of launches et cetera?

Exactly. No, of course, we will need the help of the market to make this a super success. It will be at the end, but we have a lot to do on our own to be more active out in the market and make sure that all these initiatives that we are launching are getting the planned effect. So a lot of our future success is in our own hands. I shouldn't mention anything. But if you look at the competitive landscape, I'm not super worried that we'll be run over by anybody. We have a very good position in the market, and we will continue to grow on that. But then as you said, when will it turn up? And as I said initially, sometimes you like to fast-forward life a bit, and I'd like to fast-forward to when you can see the market turning up. But in the meantime, we will fine-tune whatever possible to be ready when the business turns up again.

Yes. That's fair. And how you do you think we should look on the sales growth year-over-year comparison? The comparison figures here, are they becoming easier or is the market still extremely tough for you in order to display organic growth here in the near term?

And it's a super good question, and I wish I could answer easily. Of course, as time goes by, the comps will start to be -- times when the markets turned down last year. We had a big discussion in the Board yesterday, and we tried to get everybody's input from the reports that has been released from larger construction companies, from industrial companies and trying to figure out where is the market heading. And we have a pretty good idea at least what we planned for. So yes, the market is still slow. But also yes, at the end of the year, then we could see tougher times already last year. But we need to be super, super active in the market to make this really, really good. We have a lot to do on our own.

Perfect. And also touching slightly on the M&A agenda here. How much more can you add to acquisitions in the near term maybe for the rest of 2024 here as you see regarding pipeline and also your financial capabilities as well?

A lot and I think we communicated -- we've delivered on what we said, and we said last quarter and the quarter before that we will increase focus on acquisitions. We will be super prudent. We're not going to buy anything just to add acquisitions. So we have very strict valuation targets, but we have some interesting discussions ongoing. We said before that for us, the sweet spot -- I think you have asked before what is the sweet spot. And even if we made 7 acquisitions and some of them were close to SEK 100 million in turnover, so SEK 100 million to SEK 200 million turnover businesses, that is the really sweet spot. So then the costs for due diligence and other things are more reasonable compared to acquiring a business that has SEK 27 million in turnover. So it feels good. I think we have some nice acquisitions ahead of us, and we will continue to build this company to be super ready also from an acquisition point of view when the market turns up again.

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

Couple of questions to add to the ones already asked. Looking at the Vestby consolidation, could you maybe elaborate a little how much extra cost you saw that hitting the quarter with? And do you feel that that structure now is in place going into the second half?

Did you say debt reconciliation?

No, the Vestby consolidation, the Norwegian new warehouse.

We were pointing at each other, Irene and I, that's an issue for you. No, it's an issue for you. Okay. The question was how it's running now.