Alligo AB (publ) (ALLIGOB) Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Alligo Interim Report Q2 2023. [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, CEO, Clein Ullenvik. Please go ahead.

Okay, everybody. Welcome to Alligo Q2 Report 2023. We are super happy to spend some time with you, updating you on what we have been doing since last we spoke and to present what we think is a pretty solid report. And by we, I mean Irene Wisenborn Bellander, our CFO; and myself, Clein Ullenvik, the CEO. As you know, we have different things at these presentations. We have done logistics. We have done assortment, sustainability, acquisitions, customer strategy. And today, we will do a section on our own brands, which we are happy to share with you. As you also know, we focus on the highlights. We are not trying to go through the report in its entirety. We focus on some highlights. But before that, just a quick flyover. Alligo, a Nordic player within workwear and tools and supplies in the Nordics; some 200-plus stores; SEK 9.5 billion on a rolling 12; 2,400 employees; and as you know, all our brands, our concept brands, Tools, Univern, Swedol, Grolls. And you also know that we are slowly moving to having one brand per country is the endgame for us. The time line we went through last time, we have no intention of doing that again in detail, but just to highlight a few years at the beginning for this presentation. One is in 1963 when Swedol was founded, so we're celebrating 60th birthday of Swedol this year. And another, the very first point on this time line is 1832. I will come back to that, but it's also a brand. It was when Grolls was founded, but it's also a brand within clothing, within wear. So Alligo at a glance. We know that we are Sweden dependent, the biggest country turnover-wise and even bigger result-wise. And share of own brands, approximately 18%. I'll come back to that a little bit more in detail. Our customer segments, the 8 months, we have talked about before, approximately SEK 53 billion turnover estimated value. We focus on small- and medium-sized customers, but we're happy to serve all customers, of course, even if they are a bit bigger. What we can say to this slide is I see sometimes how Alligo has been described, and sometimes we are being listed as the industrial supplier. And of course, we have -- our biggest segment is industrial manufacturing, which is 30% of the company, but we also have 70% other customer segments. So what we're trying to build is a company which is pretty resilient to different business cycles. So even if we're having tough times in transportation and storage due to fuel prices, we have challenges in agriculture and forestry due to interest rates and construction sector, we don't even need to mention what's happening, we have a good balance between our customer segments, making it possible for us to grow profitably, even despite the well-known situation in the construction sector. So some highlights. Q2 in brief: revenue grew 5%, 2.7% organically. Our EBITA increased by 17% to SEK 201 million. Our cash flow improved from SEK 211 million to SEK 287 million. Is there any specific thing driving the cash flow development? No, it's pretty much across the line, a little bit better stock management, even if the stock levels as such hasn't come down much; a little bit better payment conditions and so forth across the line. We are updating our organization to strengthen the sales. I'll come back to that in a few slides. We have done 3 acquisitions, and we are actually opening a greenfield and new store in Boden, of all places. So business update. Market situation, pretty much the same picture. It's been a while now. Strong demand in Norway, tendency to slow down in Finland, and Sweden is already in a slowdown as we have clearly communicated for quite a while. I think we, as a management, are reasonably proactive. We have a lot of different growth initiatives going. We work constantly, as you know, with our pricing, adjusting prices. We are negotiating with our suppliers, heavily increasing our joint competitiveness. Some sensitive categories, we even reduced prices, not to price ourselves out of the sector that we are with a high-quality product at a decent price level. We work constantly with customer profitability where we need to have a decent profitability. Otherwise, we actually depart from some customers. And we constantly also work with our cost reductions, having done some 50 head count reductions during the quarter. Delivery capacity is good. And the macroeconomics, you probably know that, better from other ones. It's an uncertain world, it's a turbulent business cycle, but I think we are navigating nicely through those stormy weathers. So organizational chart, you should never show an organizational chart to a customer or supplier or any of these type of meetings, but I do it anyway, just to illustrate 2 things. Firstly, we have launched a new role, which is Head of Industry Customer Segment. And why is that? The industry segment requires some more investment to get together an offering to those type of customers. It's more complex to its nature. It's more where we work closer with the customers. It's bigger contracts. It's more complex. So we have launched a new position to, on a Nordic basis, support our industry sales. And we also moved some important product categories to this role: workwear, equipment, smart service solutions, welding and so forth. So this will be a very, very important position going forward. And heading that will be Torbjörn Eriksson, and he will be replaced as Head of Sales Sweden by Håkan Wanselius which, today, is the Assortment Manager. That was one change. And the other change is that we break out the profile companies that have been a part of the Swedish organization and put it directly under me. One reason is to make these 3 different companies be more alike because it differs, I think Norway and Sweden has no profile company. And the second reason is also to get a better feel for what they are, so we can see what are the potentials going forward, should we make more acquisitions, how should they be run. So to get a clearer structure and also to get a better understanding of what is this organization that we've built up, which is developing nicely and with good results. So as I said, own brands is a topic for today. And we do it for different reasons, of course, to increase our competitiveness and get higher margins but also to ensure that we get the best quality. So we need to have a good control of our supply chain and also the product, as such. So take a winter jacket, for example, in Univern. It could be a 30 -- 25- to 30-page long bill of material, with all the components being into that jacket. So if this is -- we're not going to a fair in China somewhere and buy something, which is already existing. We develop these garments from each thread of each and every little single component. So out of this 18% we say are our own brands, 77% is workwear, 23% is Tools & Consumables. So what brands do we have? We have Björnkläder. We have Univern. We have Gesto. We have Balance. And we have 1832 within the workwear part. And the tools and supplies, we have AmPro, Award, Nima and 4Use. So we have -- the workwear development is headquartered in Gothenburg in Almedal in a wonderful working environment. It's an old industrial building built -- or renovated and rebuilt just according to our specification. It's a creative, wonderful working environment. And there, it's the place where we develop Björnkläder, Univern, Gesto and 1832. And that task is to have innovative, sustainable and certified range. And we build the brands in the way they're to be built. We have our own lab for wearability; color, to keep the colors; and all the tests you need to do for these type of products. And we have that in-house. So how do we position our own brands? So Björnkläder is positioned as the iconic workwear. The oldest workwear brand in Sweden, for sure, potentially also in the Nordics. Its durability, function and comfort, so it's a reliable tough brand for the basic needs. And then we have Univern, it's for tougher climate. Most of our pictures -- brand pictures is from the West Coast of Norway. So it's a tough outdoor environment, more for extreme purposes. So it's protecting us from wind, water and cold. And then Gesto, which we launched late 2013, beginning of 2014, in what was then Swedol, which has been a fun journey from zero to a fairly big part of our turnover today. I still remember when I was out in the city, working with some construction workers in late 2013 wearing Gesto clothes, probably one being the most creepy guy, I was looking at them the way I did. So -- and then we launched also the Gesto shoes, which has had a tremendous development with the BOA system. So really good workwear with function with an attitude, as we say, at a very attractive price point. So Gesto has been very important for us in our journey. So financials. Finally, listen to somebody else than me.

Thank you. As Clein mentioned, we continue to benefit from profitable growth and had a strong quarter in first 6 months. Revenue increased by 5% to SEK 2.4 billion in the quarter, with 1 less trading day, where 4% was related to acquisition. The organic growth reached 2.7% driven by positive sales development from larger industrial customers in Finland and Norway. The slowdown in Sweden, that again in Q4 intensified during the first 6 months and we've seen across most customer segments. EBITA increased by 17% to SEK 201 million in the quarter, corresponding to an EBITA margin of 8.4%. The improvement in profit is driven by Sweden and Norway and is a result of stable growth in gross margins and cost reductions. The gross margin improvement is mainly related to the increased share of sales of own brands, successful supplier negotiations, termination of the contract customers agreements and general sales and assortment management. And this positive effects are, to some extent, counteracted by negative country mix. We follow our strategy of complementing organic growth with acquisitions within existing geographical markets and within the same or close project category. During the quarter, additional 3 acquisitions have been signed and completed, adding approximately SEK 150 million in annual revenues. Sales in Sweden increased by 6.5% and were positively affected by the acquisitions of 6 profile companies but counteracted contracted by our decision to terminate unprofitable customer agreements. Organic sales in the quarter reached about 1%, and the slowdown observed in Q4 continued first 6 months, and most customer segments have been affected. Improved result is driven by successful sales and assortment management, supply negotiations and cost reductions. The focus going forward is on driving sales. And the decided organizational change that Clein mentioned is part of it. The positive sales trend in Norway in local currency continued in Q2 and was driven by the good market development in the oil and gas segment. Organic sales reached about 6% in the quarter and 7% for the first 6 months, and there are signs of a weak market in other customer segments than in oil and gas. The improvement in profit in Norway is driven by stable growth, improved margins and cost adjustments. The priority going forward is to increase the share of small and midsized customers and strengthen the sales and assortment management. In Finland, we have a continued positive sales trend among larger industrial customers. Sales increased by 19.7% favored by acquisitions and FX effects. Organic sales were somewhat weaker compared to Q1 and reached about 3%. The result in Finland deteriorated in the second quarter due to investments in new and existing stores to better meet the needs of small- and medium-sized customers. In the second quarter, cash flow from operating activities amounted to SEK 287 million compared to SEK 211 million last year. The improvement of SEK 76 million or SEK 111 million, excluding IFRS 16, for the quarter, is related to increased EBITDA and decreased working capital across the line. But one thing in specific is that we have decreased prepayments to our Far East own brand suppliers. The inventory levels continued to increase in Q2 but at a slower pace. The inventory buildup is driven by the ongoing assortment merch and rollout of our own brand, and that has temporarily tied up more capital. The investing activities for the first 6 months are related to M&A activities of SEK 122 million and composed of 6 completed acquisitions with also store and central warehouse adoptions and IT-related investments. The ratio of CapEx to depreciation amounted to a multiple of 1.6. And finally, refinancing activities, so mainly related to dividends paid, increased borrowings and amortization of leasing liabilities. The group's net debt amounted to SEK 1.6 billion at the end of the period and the unutilized credit facilities, including cash, amounted to SEK 1.1 billion. The ratio of net debt-to-EBITDA amounted to a multiple of 1.8, which is a decrease compared to corresponding period last year, which ended at 2.0 and well within the financial target range. Our covenants are related to interest coverage and equity asset ratios. These are fulfilled at the end of the period and very good headroom before reaching the threshold. And 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 market.

Very good. Thank you, Irene. So moving into Q2 in summary. So we had a strong quarter and a strong first 6 months of the year. We grew profitably. We improved our operating cash flow. And doing that in an uncertain macroeconomic environment, the slowdown we have been talking about, and everybody -- it's obvious for everybody in Sweden, and we are closely following the development in Norway and Finland. We are working constantly with strengthening our competitiveness. We have had intense discussions/negotiations with our suppliers during the quarter to make us more competitive together. So there will be some changes, there have been some changes, in the product range we have, different brands leading and other brands joining our offering. We made 3 acquisitions. We'd like to do more going forward. But so far through this year, we've got a good delivery capacity for own brands, which is the other side of the coin, where Irene said that our stock levels are not coming down. We have a good availability on our own brands. So outlook 2023. We think we are well positioned in an uncertain market. The customer mix we have, I think we've proven that we can grow and we can grow reasonably profitable, even if 1 or 2 sectors are having tougher times. We are focused on driving sales. We have a lot more to do to get our offer out in the market and to activate ourselves. We have much more to do. And good availability we talked about, we need to increase the share of small- and medium-sized enterprises. We know it takes time. We know what to do, but it's frustrating that it's not going quicker. We're continuously looking at our cost structure. We are taking necessary grit. We're not doing too much to damage anything, but we're doing it step by step, I think, in a controlled way. And we'd like to put some acquisitions as a cherry on the top on our fairly good [ rating ] development. So that was all for now. Melanie, we are ready to take questions.

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

I think we can start off in Finland. You're mentioning the upgrade of the physical stores in order to meet the small and medium enterprise customers better. When are these implementations done? And do we expect it to see in other markets?

No. Finland, as we said, has the -- within "the worst shops" or at least the least one suitable for small- and medium-sized customers. Sweden has that store structure since way back. Norway is well underway. Finland has a lot to be done, which is our -- something our local management is addressing and they're doing. I think we mentioned last time, we have fixed projects running in parallel. But the trick for our -- their management in Finland is to do that in a balanced way. Even if it's the right thing to do, we need to do it in a way where we show a decent development at the same time. So we don't do it in all shops at the same time. But we have many more shops needed to do this renovation, redo, change, but we will need to do it in a controlled way. We need to show a decent development in Finland at the same time as we do this transformation. So we are at the beginning of it, but we will not do everything at onetime as we did in Sweden back in the day.

Yes. Okay. Perfect. And so we should expect this development to continue throughout 2023 then?

Absolutely. But as I said, in a controlled way. If we head into tougher times in Finland, we will need to slow down the pace to do this in a more controlled way. So you need to both develop your existing business at the same time as you do investments and run your business in a reliable way.

Yes. Perfect. That's very clear. And on that subject with weaker end markets, I don't know if it's possible, but can you please maybe elaborate a little bit more on what kind of signs you see out there regarding the weaker market in Finland and Norway? Do you have less visitors to your physical stores? Or what are customers saying to you? Or can you please elaborate a bit?

We consume all the market statistics available from our industry and from adjacent industries. I mean the installation sector, when we talk to customers, we talk to suppliers, we measure a number of visits in our stores. And so we follow it closely. It's been a slow development. We signaled it early on, much earlier than most others, I think. But again, we have huge opportunities to grow even in tougher times. Our offering is well received in tougher times, but we follow it closely. It's -- some customers are saying that we have kept our plants running just to keep them running. Now we need to balance that in a better way. On the other hand, we have other sectors where we are successful. So we need be quick as we have proven to be in finding sales to the segments, which are stable or even growing, even if other ones are having tougher times. We are consuming whatever we can get our hands for everybody. We are, as you know, very nervous people.

Okay. And it is mainly in connection to the construction market, you see weaker sites in Norway and Finland, or is it also within some other industrial segments as well?

In Finland, we had some signals from the industrial sector actually. But on the other hand, we have so tremendously much to do in construction sector and small- and medium-sized customers, hence, the investment in the shops. So for us, with 8 customer segments, I think we are well on our way to build something which is not depending too much on a single customer segment. We can find growth avenues in other sectors. We need to be quick, and we need to be out there to fight for the volumes that are in the market.

Yes. Okay. Perfect. And also, maybe I mentioned it a bit earlier, but could you please maybe highlight what kind of tools you have in Alligo that you want to highlight in order to handle these tougher markets and these market conditions?

Yes, very much what we are doing, and we have had a very intense second quarter. We do it every time. But this time, it was even more intense. We intensified discussions with our suppliers to make us more competitive together, everything from financial conditions to what assortment we should offer. We look at our cost base. We have a solid history of quickly being able to adjust our cost base to what market is out there. We have a history of being good at driving sales. We have a lot more to do there to clear a target, which customer segment we are going for, and really making us go out there. So all the classic ones in a company like ours, we are addressing and have been addressing. And that's why we have a decent Q2 despite the environment. Of course, we are taking the necessary actions. But we are far from a fine-tuned company. We have so much more to do, which in a way is good. We have upside going forward.

Okay. Yes, yes. Absolutely. And in this quarter, you were able to also increase the gross margin. You were mentioning that you are very active on pricing and also reducing prices for some customers while also increasing it for maybe the -- yes, for some other customers. But do you think it will be possible to maintain a stable gross margin in near term given what you say on pricing and the fact that maybe the larger industrial customers are performing better than maybe the small enterprises customers?

Absolutely. We have so much more to do in our agreements with our customers. We have so much to do together with our suppliers. We have so much more to do in offering our private brands, our own brands, where needed. So absolutely, our ambition is to continue to grow the contribution margin. It's also something we historically always have done, and we are very -- we're not going for volumes and letting that erode our margins. We need to have a solid margin, and we are developing nicely so far. So we have much more to do on that side.

Yes. And that sounds good. And I believe looking at the region, in Sweden, you were able to increase EBITDA in a really impressive way given the organic growth, I would say. So obviously, you're doing a lot of good things out there.

Yes. I mean we're working closely with our suppliers. And we want to win together, and I think we have a good model to do that.

Yes. Great. And maybe a final question from my side. You are mentioning in the CEO wording about cost saving program and some layoffs. Could you give us some clarification in what area this mainly affects in Alligo?

It's everywhere, but it's, of course, better to not touch the sales as much as possible. So external sales is more or less untouched, a little bit on shop sales. And then try to see in what we call the Nordic functions, what needs to be done to be more efficient. We are becoming slowly a more efficient company. IT systems are in place, processes by getting better and better in place, but absolutely not where we want to be. And then some roles, you have to question, do we really need them? So it's -- the closer you get to sales, the less our willingness is to reduce head count.

Yes. And I assume when you also able to upgrade the logistics as well, you don't need as many personnel in the company over time, if you are more efficient.

Absolutely, Emanuel. You can answer my question. You do that better than me. Absolutely.

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

Yes. A lot of good answers already. But maybe I could start to dig into slightly more of Emanuel's question there. Looking at, say, the sales development here in the first half is obviously impressive. Is it the Alligo brand that's been driving it? Or is the independent stores doing what they should in this kind of environment? It sounds like it's more driven by the big brands at this stage.

Yes. I mean it's a little bit everywhere. We have areas where we are super happy. We have areas where we are not so happy. But of course, we have a strong position in certain parts of the market than expected. Swedol brand in Sweden is, of course, really, really strong. And as we've said, that has traditionally performed well also in very, very turbulent times and has continued to do that. And we've seen great improvements in Norway and in Finland. So in all corners of our organization, we are getting better and developing nicely even if we then, this quarter, invest quite a lot in Finland. But it's across the line. And I think it is also fun to see the progress we are making with our partners and suppliers. We are in this together. And the way the discussions have been -- they have been intense, sometimes tough during the quarter. But we connect, and we're going to win this together. So I think it's lovely to see different parts of our organization has really stepped up in these challenging times.

It's good to hear. It sounds like you are very confident about your self-help opportunities in a potentially weaker market. Is that the way we should see it?