Alligo AB (publ) (ALLIGOB) Earnings Call Transcript

Okay, everybody. Welcome to Alligo Q3 Interim Report. You will hear from our CFO, Irene Wisenborn Bellander; and myself, Clein Johansson Ullenvik, CEO. You know the drill. We will not repeat what's in the report, you've probably read it or will read it. So we will emphasize what we think is important to highlight, and then we will open up for questions. We have a few topics we will cover, a quick presentation of Alligo, a lot of companies are reporting these days, and you probably attend to several presentations. So just a quick to set our minds on Alligo, then Q3 in brief, that will come into, as you know, we'll try to make one theme each presentation and we have covered already logistics and assortment. And today, you will hear from Irene presenting what we are doing briefly within the sustainability area. Then we'll come into financials, and then we'll wrap it up in a summary and an outlook. And after that, we open up for questions. I hope you will enjoy our little session together. So just a quick to repeat what Alligo is, a leading player in workwear, personal protection, tool supplies in the Nordic region. We believe in a common platform, Alligo is where we all belong, that's our core values, our strategies, our plans even if it sells Tools with all Univern or Grolls on the business cards on our brilliant salespeople meeting customers. It's all -- we all belong to Alligo. So this is the structure of the business. You know we are quite Sweden dependent, biggest business we have and also from a profitability perspective, the most profitable business we have. And own brands is a little less than 20% of our turnover, and we have some 200-plus shops. 8 customer segments. In these days, when we consume a lot of market outlooks, we try to look on that through the filter of our different customer segments, trying to identify where the market is heading. But we have these 8 different customer segments where manufacturing and construction are the 2 biggest ones. We define -- the way we define the market is a SEK 50 billion business in the Nordics. We want to be a fully integrated company that you know, and it's important for us to underline that time after time after time. And as time has been after the historic Monday or the brutal Monday, sometimes you could wonder if -- how difficult it could be to strive for an integrated company with all the hassle that could be integrating the businesses like this. But we believe in that [ growth, ] and it works well for us. So from a customer perspective, we want to be strong facing the end customer, that means that you will never find our own brands at our competitors' stores. That is giving us a competitive advantage. And the offering, we believe in a product assortment, which is standardized in combination with a service offer is the strongest one and then different ways of going to market digitally through shops, physical meetings or whatever the customer wants to meet us. So if we skip to Q3 in brief, we are so happy to say that, we have left these disturbances as we presented last report that we headed into as could have been expected, doing so many things at the same time as we did in May, we head into some disturbances, which we were suffering from. And now we can tick off most boxes. Since before, we have a common strategy, we have our financial and non-financial targets. We have integrated the stores, and we have a legal structure in place. But as you know, the 3 to the right coordination of logistics, pricing system and ERP launch of a new ERP system in Sweden. We did that in May this year, which led to some disturbances, which we now confirm we have behind us. Coordination of logistics, we have done what we said in the integration project, but you also know that we have communicated that we will build a new central warehouse in Norway, which is not included in the integration project as such. But we have more to do, but that's more operational efficiency that we will drive. And ERP, produce implementation in Norway will be end '24 or beginning 2025. So -- but from a business perspective, we tick them off and say that those parts of the integration project is ready, leaving only one left, which is implementation of the Nordic assortment, which has been rolling out since a while back, but we don't -- it's not finished until we have a higher degree of implementation in all shops in more of our customer contracts. And also until we have balanced now, as you know, we have a period now where we have higher stock levels because we are phasing out products and brands and phasing in new ones. And we will not say that, that activity is in place until that is in balance. So that's why this is the -- more or less the only remaining thing. All other smaller things is included in the more daily operations of what we are doing. Made 2 acquisitions in the quarter, 2 smaller ones, 1 in Norway and the one in Sweden, adding up now so far this year to 5 acquisitions, 1 in Finland, 3 in Norway, and 1 in Sweden so far this year. Revenue increase of 14%, 10% organic growth, but as you know, also a high impact from inflation, of course. We are reasonably happy with the EBITA development, 21% growth with a 14% growth in top line. But if we were a fine-tuned business and everything in place, which we are not yet, we would like to see that ratio to be even better. But we are quite happy with the 21% EBITA increase. And cash flow, as we have said many times is, of course, suffering when we have built up stock just both to ensure the availability, but also launching the new Nordic assortment. So that is -- with that, over to you, Irene.

Thank you. Alligo has a clear vision of becoming unbeatable as a leader for sustainable development in our industry. We have concrete strategies of how we will reduce the environmental impact of our own operations, but also how to work with our suppliers to ensure sustainability throughout our value chain and help our customers to reduce their environmental impact. Based on our vision and material sustainability issues, we have set 5 non-financial targets related to our employees' health and leadership, customer satisfaction, supplier responsibility and climate impact. During the autumn, our ambition is to have established a strong basis from which to set a common goal to reduce carbon emissions to guide our business forward. Around 80% of the carbon emissions in our value chain are generated by manufacturers, suppliers and shipping companies. This is where we can make significant efforts to reduce our climate footprint. This is also where we see the greatest sustainability risks in relation to human rights and working conditions. Maintaining close cooperation with our suppliers and stipulating clear requirement is an important focus for us. An active sustainability agenda is a prerequisite for serving many of our customers today, and we have several ongoing initiatives that aims to use resources more efficiently. One example is the product development and specification work of our own brands within personal protective equipment. Each component in -- for example, in Univern, workwear [ jacket ] has been analyzed in detail to fulfill all requirements before it has been chosen to be a part of our own brand products. Following this, the main part of our own brands is OEKO-TEX certified to ensure high-quality, sustainable materials and safe products. Moving on to the financials. We continue to benefit from increased revenue and improved margins in challenging times. Total revenue increased 14.1% to reach SEK 2.1 billion, where 2.9% is related to positive currency impacts and primarily driven by the development of NOK. Organic growth in local currency in the quarter reached 10.2%, driven by positive sales development from larger industrial customers in Finland and Norway, but also small and mid-sized customers in Sweden. Thanks to larger industrial customers in Sweden were still negatively affected by disruptions resulting from the implementation of a common business system and the new logistic structure in the second quarter, even if the effects gradually diminished during this quarter. EBITA increased by 21% to SEK 166 million in the quarter, corresponding to an EBITA margin of 8.5%. The improvement in profit can be seen across all countries and as a result of increased sales volumes, better margins and synergies between Swedol and Tools. In addition, the somewhat increased proportion of owned brands also contributes positively. However, we have a negative country mix, net contracts since the sales share related to the Swedish business with a more favorable customer mix decreased. If we look into each market, we can see that the organic sales in the Swedish business reached about 9%. And there was continued good sales development in Q3 related to small and mid-sized companies after a general restraint in Q1. The sales and margin development within the Industrial segment still suffered from disruption in logistics and sales processes, although these are gradually diminished and sales began to pick up towards the end of the quarter. The improvement in profit in Sweden is driven by increased volumes, synergies between Swedol and Tools and margin improvements related to small and mid-sized companies, but somewhat contracted by lower margins in the Industrial segment. After a weak start of the year in Norway, which stabilized under Q2, we had a positive development in the third quarter. The volumes are now ahead of pre-corona sales levels in local currency. And the organic sales in Norway reached about 15%, driven by good market development in the Oil and Gas segment. The improvement in profit is driven by higher volumes and integration synergies. In Finland, we have a positive sales development, and there is a continued positive sales trend among larger industrial customers. Organic sales reached about 9%, and the result was strengthened because of higher volumes, but also increased margins and our measures related to improved sales and [ management. ] Let's turn to cash flow. And the third quarter is seasonably the weakest quarter from a cash flow perspective. Cash flow from operating activities in the third quarter amounted to minus SEK 91 million compared to SEK 64 million last year. Operating cash flow is negatively affected by increased working capital due to the continued buildup of inventories and prepayments to own brand suppliers. The inventory buildup is a result of the ongoing assortment match and the rollout of own brands, but also, of course, higher purchase prices including freight and unfavorable currency effects. The right-hand graph shows the development in liquidity from January to September. We have a positive cash flow from operations of in total [ SEK 91 million, ] including an inventory buildup of SEK 283 million. Most of the investments are M&A related, but SEK 96 million is related to store and central warehouse, adoptions and IT-related investments. Finally, the financing activities are related to the amortization of leasing liabilities of SEK 280 million, dividend paid of SEK 88 million and increased usage of the credit and revolving facility of in total SEK 239 million. In summary, our focus on product availability and investments in the new range have tied up more capital and temporarily reduced cash flow. The group's net debt amounted to SEK 1.8 billion, and the increase compared to year-end is driven by integration investments, inventory buildup, shareholder distribution and M&A activities. The ratio of net debt to EBITDA amounted to a multiple of [ SEK 2.2 million, ] which is an increase compared to year-end, but still within the financial target range. Our unutilized credit facilities at the end of the quarter amounted to SEK 907 million, and the maturity of the total credit facility is March 2025 and possible to prolong 2 years thereafter. In summary, our strong financial position means that we can continue to invest in organic growth and take advantage of potentially good M&A opportunities in our markets.

Thank you. So if we move to summary and outlook. Five reasons to invest in Alligo, attractive market growth and resilient customer segments. And there we can say also within the customer segments we have, we believe that we are reasonably well positioned if the construction sector, for example, it's not so much the actual carpenter or the builder, it's more on the excavator side, building infrastructure and so forth. So we believe we have a good position in interesting customer segments. Scalable platform, as we talked about before is our belief. We think that's the most efficient way of running this type of business, and that's why we go through this type of hassle as we did in May, June, July. Owned brands is a very powerful weapon for us in the competition with our competitors and also gives us a healthy contribution margin in combination with strong, of course, external brands with our partner suppliers. Sustainability as an integrated part of the business, you heard Irene just now describing a little bit what we're doing. And for us, that is, of course, a very, very important part. And we want to be a leader in the consolidation in the Nordics. And now we can more focus on that having left a lot of internally focused projects behind us, we can now start looking outwards more also making acquisitions. So outlook, yes, the integration work, as we said, we say that, that is now a part of the daily operations, not a specific project. We have had 4 overarching themes to run our business, not having too many different focuses, everybody running around confused. So we have said for 2022, so far, the focus has been making our people grow, focus on the integration work, ensure profitable growth and fine-tune our business, improve collaboration and processes that is. But we have said just now that those 4 will be 3. So we will focus on developing our people, ensuring profitable growth and fine-tune our business. We have a good availability now, there was some months back, a lot of noise that we have shortages. That is silent now. We have a good availability, good possibility to deliver in time, but we have more to do in sales and assortment management. And we have -- especially in Norway and Finland, we have still a customer mix, which is heavily tilted towards large customers. And we have initiatives now driving up that share. We -- that's our sweet spot, the small and medium-sized businesses. It's a challenging environment, at least ahead of us. We consume a lot of market outlooks. We talked to a lot of people, customers, suppliers, different institutes, and we spend hours and hours and hours trying to figure out where the market is heading. And we are prepared for whatever the market could throw at us, but we also have reviewed how we have structured to the sales organization in all 3 countries. So now the last 2 months of this year, we will implement a new -- from a sales management perspective, the stores as such, the external sales and the key account sales is not such affected, but how we run the businesses and how we run the regions and districts, a new model will be implemented at the end of this year. And as we said earlier, we hope to continue a healthy organic growth, and we will spice that up with acquisitions is our target. And we open up for questions.

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

A couple of questions from my side. And regarding, firstly, the impressive organic revenue growth you had in the quarter of 10.2%. Can you please elaborate a bit on how we should think about how much is price and competitive volume, et cetera?

That was the question I was fearing the most, which is almost impossible to analyze in -- at least in details. Of course, you have a high, as I said earlier, high impact of the inflation. But we have grown a lot with larger customers, those were the customers where we, at the very latest stage could implement price increases and also perhaps not the same level of price increase as to other customer categories. But it's for sure, a number of percentages, of course, is an inflation factor in this. That's for sure. And we -- just as we were hoping that now the inflation speed would slow down now than the Swedish krona, of course, worsened quickly. So we foresee inflation also going forward. So our next price increase time is beginning of February next year. And suppliers should now inform us about what they want to have done. And it's obvious that we will see inflation also in the beginning of next year.

And sorry, if I missed out on the private label and on how much revenue that steams from private label, but it's accrete year-over-year. Is that an effect of changing the assortment and also the divestment of Gigant -- or how should we view it?

The latter one that we divested Gigant as -- that's the drop in what is being defined as private label. We still sell that assortment, but it's not statistically an own brand anymore.

And regarding the supply chain, have you experienced any like improvement during the quarter? Or how is the supply chain situation at the moment?

Yes, absolutely. And as many companies who have reported so far this quarter, it's much, much better. The container price has gone down a lot during my years I've experienced $1,500 per 40 foot container up to $20,000 to $24,000 per container. Now they are down again to, I think, around $6,000. So it has gone from a decent level up to incredible level down to just normal high level. So the freight cost is better the actual supply chain as such is working on no ships stuck in the Suez Canal and the Shanghai port is okay. The disruptions we are noticing today is energy shortages in some of the countries, where we produce our own brands. So it's more on that sector, and then actually the freight part as such. Actually, it's just a fun fact, I had a meeting this week with a supplier from Pakistan, and to counteract that part, he opened his own power generation business. So he is supplying his own production by his own power generation business, which is incredible when you think of it.

And if we move forward to like the working cap and obviously the inventory buildup that we have seen as a consequence of the new assortment and also the Tools, Swedol. How should we expect it to look like going forward? Should we expect the inventory to slightly reduce in the coming quarters or is still an upbuild?

No, from now on it should only go one way. It's not fine-tuned yet. And we said we will not tick that box that says that we have managed to roll out in Nordic assortment, standard assortment until we have balanced the stock levels. But if we are helped on the turnover by inflation, we are also punished in the stock level by inflation. So if you take the ratio inventory growth in relation to sales growth, we are not so far off. But having said that, we have a lot to do in inventory management, and we will do.

And heading into Q4, we know that from last year, you're coming from kind of tough comparables, given the weather condition that was kind of beneficial last year when you sold a lot of working loads, et cetera. How should we view Q4 this year, you believe?

That's a very good question, and thank you for bringing it up. I should have reminded everybody about Q4 last year. Now we had a Board Meeting last night, and we could conclude that -- in Stockholm, it was 15 degrees yesterday. So -- but the quarter is still not over. So on the one hand, we'd like to see colder weather, of course, on the other hand, we are a totally different company Q4 this year than we were in Q4 last year, i.e., better company this Q4 than last Q4. So -- but if you could fix a little bit colder weather and a little bit of snow, that would help.

But there's no like change in demand from customers from Q3 and Q4?

No, nothing on that side. It's a bit more in being a weatherman, but we are weather affected, of course. So we'd love to see in November and the beginning of December, which is cold, that would help.

Yes. And a last question from my side, and as I guess many others have heard about and that we -- and obviously, all also are fearing or trying to estimate the period going forward next year where we probably are entering a kind of messy-period or environment with weaker demand within construction and maybe in the industrial segment as well. Can you please elaborate or explain your view on how Alligo will handle a tougher period with weaker demands and maybe give us some history from your Swedol days? And how we handled weaker demands before?

Yes. I'm so happy that this potential downturn -- potentially, which will be obvious, will happen when we are a much more stable business than we were over the last 2 years. So we are in a position where we now can focus on the sales and operational efficiency to take measures for whatever development that market can take. But we have -- internally, we have somewhat of a crisis attitude since months back, and we work with scenarios where we discussed with the management team and with the Board what happens if it turns down by 5% or 10%. And then we have a high level of readiness to take whatever measures needs to be taken. But looking back, I've said it several times, and I think I wrote it in the CEO part of the report. Historically, it has also given us opportunities because with our own brands, it's high quality at a little lower price point. And historically, that has tended to be attractive when established relations between the previous supplier and the customer when they suddenly need to look around a little bit, and we can come with our offer. So historically, that has opened opportunities for us, of course, if the whole market goes down, we will be affected as well. But it also presents some opportunities for us in a good time when we are now ready to drive sales in a better way than we are today.

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

Just to continue on the previous, it's good to see that you're at least alluding to, if you're not able to fully disclose what kind of price impact you have seen in the organic growth that you are talking about volume growth again. So do you feel, what's -- if you compare that to the market environment you see out there, are you keeping your market share or taking market share at this stage?

At least now we are -- throughout the company, at least keeping our market shares. I wouldn't say that we have taken dramatically market shares now. But it's so incredibly nice. We have this competence days where we gather all salespeople in all countries, and we launch our messages and we have training from our partner suppliers. And the message there was very, very clear. Now this internal hassle is over. Now we point all our efforts and energy outwards out of the market. So that journey starts now. But I wouldn't say -- we have actually intentionally left a couple of big customers, because the level -- the price level was too low, and they weren't ready to negotiate at all that we have said, let's not cooperate anymore. So we also changed the customer structure, which could hurt a little bit short-term, because it could be a number of employees working solely with that customer. But that's a transformation we need to do. So at least, we are on the same, we are not losing market shares, it's the short answer.