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

Good day, and thank you for standing by. Welcome to the Alligo Interim Report for Third Quarter 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 our speaker today. Clein Johansson Ullenvik, please go ahead.

Thank you, Nadia. Welcome to Alligo Q3 report 2024. The presenters today will be our CFO, Irene Wisenborn Bellander, and myself Clein Ullenvik. Those pictures are only 2 weeks old. I didn't think I could reach a new level of pale and gray, but I did, obviously. But our CFO looks alive and well. It's a report busy day, and as always, we'll focus on the highlights. And as per your request, the theme of today is welding. So Alligo, we've had, as you know, sometimes many slides describing the Alligo group and they have become fewer and fewer, and this time we only show one slide. So, unfortunately, still a bit shy of SEK 10 billion turnover, 2,400 employees, 215 stores, I think, actually it is now. And what is -- good is that we now have one concept brand per country, but many other smaller companies within our group. But main concept brands are TOOLS in Norway and Finland, and Swedol in Sweden. So highlights, the market is still weak, and we are still suffering a lot from our beloved small and medium-sized customers that we love a lot. They are suffering. We, together with many others, had hoped to see some signals in the sales figures by now that, that market is recovering. That is yet to be seen, but we still hear positive signals. We as a management, we reflect every day, have we done whatever possible to drive the group forward, and I think we can conclude that, yes, to the greatest extent, we think we've done that. We try to find areas where it's stability or even growth. We continue to focus on acquisitions. We were very early on identifying the potential downturn in the market. So we've been working with cost structure and efficiencies the 1.5 years or even more, finetuning our inventory levels and working with price adjustments, partly in the high inflation environment and now heading into a very low inflation environment, possibly the assortment, perhaps even in a deflation environment. So not pricing ourselves out of any important customer segments. So delivery capacity, the group is stable in most aspects. We are still working with finetuning the Vestby, the new warehouse outside Oslo, Norway. We have some things still to be done, but it's moving on in the right direction. And macro factors, I don't even need to communicate it. It's obvious for everybody, I think. So Q3 in brief, slight growth driven by acquisitions, mainly. Operating cash flow, quite a lot above last year, but on the other hand, the EBITDA quite a lot down. Irene will come back to this in a while, so I don't need to dig into too many details. But the adjusted EBITDA margin down from 9% to 6.4%. And the gross margin, it's reflected in the mix of our customer segments, but we'll come back to that, as said. Highlights. We have linked the already existing loans we had to sustainability targets. We think that is a signal that we are doing the right things and we're taking sustainability in the greatest respect and have a great focus on that. We continue to do acquisitions, completed 4 of them during the quarter, SEK 220 million in the turnover. And 2 of them in the welding segment, come back to that shortly. And 2 other acquisitions has also been in Finland, which is fun, at least one of them very much focused on the defense industry in Finland, which is to say somehow, unfortunately, predicted to have a good future sales wise. And we are investing in sales. We have appointed 2 Nordic sales segment managers, one for construction, one for industry. And we are actually investing in people in positions to drive the right type of sales. So to go into investments, just when we say investments, what do we mean? So if we look at this slide and from the down left, we have, since a while, been working with own products in price sensitive areas where we can strengthen our competitiveness. 1 being INNO in fasteners, we've talked about that before. One being 1832, which is a professional high-quality workwear brand, our own, but at a little lower price point for the very price sensitive customer segment. So as a step-in brand for parts of the assortment 1832 will play a very important role. Then they have Prowell, sounds like a shampoo, but it's actually hand tools also to take that position of a little lower price position, but very good products and then award in the more technical product, workwear, lightning and so forth. Then one step up, we are focusing on services. Smart Services, you heard us talk about before that we are focusing even more on, but we are now launching Smart Wear where we can have sewing services, laundry services, and so forth, which is a big market, and we have not been active there yet. And it's good for many different reasons. First of all, being that you first sell the workwear and then you can have a recurring business when you actually do the laundry and the adjustments on the workwear going forward for many years. And as I said earlier, reinforced sales organization, the 2 segment managers, whose main responsibility is to put together an offer, which is perfect to execute the production customers and manufacturing customers, making sure that we have the right assortment, that we have the right service segments within the bigger segments that actually shows growth, for example, in construction. If housing construction doesn't pick up -- [Technical Difficulty]

Dear participants, please stand by. We'll just resume shortly.

Can you hear me now?

Yes, speaker, please proceed.

It seems to be a sound issue, but hopefully I'm back on track. I'm not quite sure where we got lost. But just to finalize where the investment areas, where the services Smart Service and Smart Wear we invested a lot in. We try to focus on the growth areas available in construction and in manufacturing. In construction, it is in the infrastructure side, it's predicted to have a growth and then the service sector. And in manufacturing, we try to sell. Historically, we have delivered a lot within the tools and supplies area, and we have an undershare of workwear towards the manufacturing industries. So there we invest and we have hired people to assist our key account managers. I hope we didn't lose too much of that slide. So if we then move into welding, as per your request, and looking at the map, it starts to feel good. We made 6 acquisitions since June last year. We have more than doubled our welding sales. We had pretty big sales towards welding before, but now we have more than doubled it. And it includes the welding machines, consumables, service repair, training and even rental. But looking at the map, as you can see, 2 good ones in Finland, plenty of them in Sweden, and we already had a pretty big existing welding business in Norway. So why is that a good fit for us in Alligo? First of all, it's technical sales and we'd like to move the group more and more into technical sales to actually add expertise to our customers. And we also want to be closer to the customer's process and the welding companies are really involved. And by that you also get a long-lasting relationship. Many of these companies have decades long relationships with their customers, and healthy margins. So we have a customer base within Alligo, within the TOOLS, Swedol brand with customers that needs a better welding offer, which we now can offer with these companies. The relationships are mentioned and there is good synergies to extract, first of all, with the welding companies within them to focus on the right assortment, but also to sell more of product available from the Alligo group to these customer categories. So welding is getting into more technical sales, closer to the customer process, to their own processes and to get synergies. So they will be kept as specialist entities, not being integrated and lose their identity. And it's already started this coordination, which is so nice to see where take Vasteras, for example, where we acquired Brantestig, they are as we speak sitting down looking at the customer list, which customers did this Swedol district have, which needs more welding. Which customers did Brantestig and have that needs more tools and workwear. So that work has already started and it's good findings coming out of that. And we have done a lot, but there is more to be done within the welding side. We see great potential to continue to grow organically and through acquisitions. Yes, so 8 acquisitions during 2024, adding a little shy of SEK 0.5 billion to the sales when it's a full year effect, so to say. So financials, Irene?

Yes, thank you. As Clein mentioned, the same trend that has been seen throughout 2024 continued into Q3. The weak market has primarily impacted small and mid-sized businesses and negative customer mix effects have hurt our contribution margins. Revenue increased by 1% in the quarter. The negative organic growth in Finland and Sweden continued, ending at minus 3%, but it was offset by acquisition-driven growth of 4.8%, EBITDA reached SEK 137 million compared to SEK 191 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 declined to 6.4%, and the drop in profitability was driven by weaker demand and margin pressure caused by unfavorable customer segments and price mix effects as well as disruptions at the logistics center in Vestby. This slide, you can see the parameters that affecting the trading gross margin. And as you can see, we continue to increase sales related to our standard assortment. However, the share of sales of our own brands has decreased due to recent acquisitions and the customer mix with a larger share of industrial customers buying fixed assortments of external brands. The weak market has primarily impacted small and mid-sized customers and the decline in the share of more profitable SME customers in Sweden negatively impacts the group's contribution margin by 0.6 percentage points. However, we continue to uphold the margins within the SME segment in Sweden. In Norway, the oil and gas segment continues to develop well and represents a higher share of total sales. This development has negatively impacted the group's contribution margin by 0.3 percentage points. In summary, the negative customer segment and size mix in Sweden and Norway are the main explanations for the 1.1 percentage point drop in contribution margin in Q3 compared to last year. Looking into each market, we can see that sales in Sweden increased by 1.5%. Organic growth was negative at around minus 5%, contracted by 6 completed acquisitions, 4 of which were within the welding sector. And the weak organic growth primarily impacted the SMEs, while some larger customers such those in the defense and energy industry had a positive sales trend. EBITDA ended at SEK 97 million, and the EBITA margin reached 8.3%, which is behind Q3 last year. And the decrease is due to weak volumes and margin pressure caused by unfavorable customer segment and size mix, while cost savings somewhat mitigate that effect. Sales in Norway were in line with last year, including 2 acquisitions. Organic growth reached 2%, driven by continued strong market in the oil and gas customer segments. And when it comes to Finland, sales were in line with last year, including 2 acquisitions and the clear slowdown in the manufacturing industry in Q4 last year continued and organic growth was negative at minus 8%. When it comes to cash flow, the third quarter is seasonally the weakest quarter from a cash flow perspective. Operating cash flow improved from last year and amounted to SEK 116 million and weaker sales and work with decreasing inventory levels have had a positive impact, while lower EBITDA and the customer mix with a larger share of larger industrial customers with longer payment terms contracted. The first 9 months investing activities are mainly related to M&A of SEK 290 million, consisting of 10 completed acquisitions, but also investments in noncurrent assets of SEK 80 million. CapEx to depreciation ratio amounted to 0.8, which aligns with our long-term target level. And finally, the financing activities are related to increased borrowings, amortization of leasing liabilities of SEK 288 million and dividends paid. As you can see, net debt at the end of the period was SEK 1.8 billion, an increase from year-end due to the completed acquisitions and the increased dividend payments, but still in line with September last year. The ratio of net debt to EBITDA was a multiple of 2.2, which is higher than last year due to lower rolling 12 month's EBITDA, but still well within the financial target range. Leverage is expected to improve through year-end, following that Q4 is seasonally strongest quarter. And as Clein mentioned, our existing term and revolving facility were sustainability linked in Q3, and this will impact the interest rate slightly from Q1 next year, up or down, but at maximum 2.5 basis points, depending on whether we perform on the sustainability targets. Unutilized credit facilities, including cash amount to SEK 1 billion. And our covenants relate to interest coverage and equity asset ratios, and these are fulfilled at the end of the period, and there is good headroom before reaching the threshold. Handing it over to you, Clein, for summary and outlook.

Very good. I don't know if it was the picture of me that made me not being able to hear me speak, but I hope it's better now. Continued weak market, we drive growth wherever we can find. So we are developing and strengthening our offer. We know we're doing the right things, we know it will pay off. We are improving our sales offer effort and offerings, and we are continuing to make strategic acquisitions. As you have seen, we have increased the acquisition pace, and we will continue to do that. We have invested in welding. We have invested in product media companies, and it will -- other technical areas will follow. Good delivery capacity. Cautiously, we can see that we see positive market signals, not visible in sales statistics yet. But just this month, we are having the so famous Swedol days and TOOLS days and just talking to customers who are in our shops, it feels like it's a much more positive tone these days. So the outlook for 2024, as we have said so many times we're well positioned. We will take advantage of this slower market to continue to improve, to continue to improve our offer and to make acquisitions. Those new launches we are making will make us more competitive, not losing customers because we don't have an offer in the lower price range. We are stopping that with these launches. And then, of course, we will set climate targets in line with SBTi and sending it more or less as we speak for validation. Very good. So back to you, Nadia.

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

Sorry if I may be repeating some questions, I had some technical difficulties hearing some part of the conference call. But just looking at the different niches that you are active in within product media, your more or less legacy business, if you can call it that, and also be the welding business. Can you maybe give us some coloring on how these kind of 3 different niches are performing at the moment, which faces the toughest time and yes, the other way around?

Very good question. And it's -- we're happy to see that the welding business, if it's our brilliant intelligence or its luck, or something in between. But that is very resilient and it's developing nicely. So the welding sector is keeping up nicely. Yes, of course, the industrial sector is not as hit as the construction side, so that is, of course, a part explanation. But the welding business is keeping up well. The product media companies are keeping up okay. And then in the normal mainstream business, of course, the smaller the customer, no matter what segment actually, the tougher they have it. So even in the manufacturing side, the smallest customers are suffering there too for some reason. But the most worrying trend since a long time now is, of course, in the construction sector, the lovely small and medium-sized customers we have. And they, I think, would need some more positivism from us as private persons to get the wheels turning again. But welding is keeping up very well, product media, okay. And then it's a scattered picture for the rest of the group, but positive signals throughout the group, of course. And not to forget, we have a lot to do even in a slower market we need to be better at going for the volumes that exist in the market.

That's clear. Just looking on the small, medium enterprise customers, have you experienced a slowdown throughout the quarter or in the beginning? Or has it improved somewhat, or what have you seen during Q3?

It varies strangely between more or less weeks and with months. We felt that in August, now everything is pointing in the right direction and then it slowed down again in September. I hope this volatility, it's -- the long range of it, at least, if you look at the trend diagram, is pointing upwards. And I mentioned the Swedol days, I were in some shops in Stockholm, and I ran into our Regional Manager, [ Therese ] and she said, look at this, she said. I said, what should I look at? Look at this, don't you see? And I said, what? What should I see? The shopping carts are out again, because for a very, very long time, our customers have come into our shops and they can -- they're not buying more than they can carry more or less in their hands. In these Swedol days the shopping carts were out again and they were filling them with products. So I take that as a little, little signal that things are picking up. But much more positive tones. But again, we have so much more to do to direct our sales efforts to areas which actually shows growth as well, and we historically have been able to do that.

So would you say that the reception of the Swedol days was quite okay? Or how would you put it?

Absolutely. It was in line with last year, and that is -- there has been -- the market has turned to the worst during that year, but it was in line with that year. So that we see as at least a stability signal, so that is good.

And maybe Irene or you Clein, can maybe give us some more additional coloring on the gross margin here, which decreased somewhat year-over-year. I understand the mix effects here. But could you maybe give us some more colorings between Q2 and Q3? What have you seen impact -- why have you seen a higher decline of the gross margin this quarter compared to Q2?

It's quite complicated because it's different -- several different mix effects. But the drop related to the share of SMEs has actually been the same level as we have seen in Q2. So that's more or less the same thing, and when it comes to Norway, that's also the same thing. But of course, that are different kind of things that also impacts the gross margin like customs handling and so on. And we were hit by some costs related to customs handling as well in the quarter. So that also explains the significant decrease in gross margin for June.

Per customer segment, the gross margins are stable. Luckily, we have been able to find volumes in sectors which unfortunately are at a lower gross margin level. So it's, in a way that is disturbing picture that we've been able to grow in areas which has not been the small and medium-sized customers with the highest gross margin. But if we look customer segment by customer segment, as you showed in the previous slide, we can explain the drop in gross margin. And that's one of the 2 things as you as a management team should really focus on in slow times. Do whatever you can on the cost side without destroying the business in the long run, and keep up the gross margin per customer segment. Because the gross margin you establish in bad times, that is the gross margin you are stuck with when the business turns up again. And we can conclude that we have within a few tenths of a percent the same gross margin per customer segment. And it is a mixed effect. I know the word mixed effect is something you use when you have no clue what you're doing, but it's actually true in our case, mixed effect looking, because of the different customer segments growing or shrinking.

Actually, both customer segment and customer size.

And just heading to the short term here and the next upcoming quarter then, what do you think we should expect here? Should we expect the gross margin to follow the same pattern as we have seen here in Q3 or?

For the last quarter -- let me take that. For the last quarter, we already have 1 month behind us, and it will be a similar picture. But we all had hoped there are so many companies that has reported and will report where we all collectively predicted that we should also see a market upturn during second half of 2024, and that has not materialized. That is obvious. So a bit into 2025, hopefully, first, the market stabilizes and in combination that our sales offers pays off in combination that the acquisitions we've made pay off. So a long answer, but for the last quarter there shouldn't be any major changes up or down. But step-by-step during 2025, I see no reason why we shouldn't come back to like where customer mix-wise and thereby also be [ profitable ].

But would you say that you have seen a stabilization already now in the market? Or is it still deteriorating?

It's also -- it's not getting much worse. No, it's stabilizing, absolutely. But as you know, we are very prudent and do not dare to give any hints of that now everything is hunky-dory and we will grow like crazy. That's not the situation. We are fighting for the contracts, we're fighting for the customers. And what happens in a market which works, it's a market economy and it works. Is that the areas that are stable and that can show some growth, of course, everybody, all of our competitors, they also enter that market, and we have a clear ambition of keeping the gross margins up. So it's a delicate game going on every, every day. But yes, let's conclude that it's reasonable, stable as it is. I will not be able to say that we can see that it is starting to grow.

I understand. I understand. But once -- since you're seeing maybe a larger share of big customers in Sweden for example, how has the development been with large customers with regarding private or own brands?