Alligo AB

STO:ALLIGO B

Earnings Call Transcript

[Operator]

Welcome to the Alligo Audiocast Teleconference Q1 2022. [Operator Instructions]

I'll now hand the floor to Clein Johansson Ullenvik, CEO. Please begin your meeting.

[Clein Ullenvik, executive]

Thank you. Welcome to Alligo Interim Report Q1 2022.

If you start on Page 2, the presenters today will be Irene Wisenborn Bellander, our CFO; and myself, CEO. You know how it works. We will give a brief presentation. We are not going to repeat what's in the report. You read it or either will read it. So we will highlight a few things, which we think could be of interest to you. We will focus on each call going forward quarterly on a specific topic. This time, we have 2 slides on the logistics structure and what we're doing within the logistics area. And then we will cover other topics as we go along to other quarterly presentations. And at the end, you will be very informed about what we are doing. And at the end, as we said, we will open up for questions.

So if we turn to Slide 3, Alligo at a glance, we will continue to repeat this one. We're a leading player in workwear, personal protection, tools and supplies in the Nordic region. We have a mission, which is we make companies work. We focus on our customers, companies and make them work. And we have several different concept brands and different product brands, and we meet the customers wherever they want to meet us, if it's in a store, if it's through a web page, if it's a physical meeting and whatever, we are there. So you can see the Alligo at the bottom, the little model, that's where we all are employed at our core values, but then you know our concept brands; TOOLS, Swedol, Univern, Grolls, and a number of specialist companies.

If we turn to Slide 4, you see 2021 figures. So out of our SEK 8.5 billion turnover business, close to 60% is Sweden and then second biggest Norway and then Finland. And as you can see, by far, the most profitable country we have is Sweden. Own brands, a little shy of 20% of our sales, many strong brands. It's not -- as you know, I continuously say, it's not cheap copies, if you take Bjornklader, for example, it's the older workwear brand in the Nordics. So we have own brands, but it's not any cheap copes. It's the real deal. And we have some 200-plus shops throughout our 3 countries.

If we turn to Slide 5, we have 8 customer segments. And of course, it differs a lot from country to country. One example, fishing and agriculture and oil and gas is, of course, biggest in Norway and other sectors are bigger in other countries. We say that, approximately, our market is estimated at SEK 50 billion in our countries per year. And we have a combination of small and medium-sized companies. We love small and medium-sized companies, and we build the company for those even if we serve all, of course, same type of customers, but we'd like to gear ourselves towards small and medium-sized customers.

If we turn to Slide 6 -- we'll get to Slide 7 directly. So Q1 in brief, a few highlights. As you know, there was an Extra General Meeting on March 23, when it was decided to spin-off Momentum Group and each shareholder of Alligo got a share in Momentum Group. We got a new Chairman in Goran Nasholm, a very experienced person. So we got ourselves a new Chairman.

We made 2 acquisitions, the Lunna business in Norway, SEK 80 million plus business, perfect for us, and Liukkosen Pultti in Finland, a SEK 40 million business, perfect fit for us. Exactly those type of acquisitions we'd like to make. And we are so happy that we could do a couple of smaller acquisitions in the middle of everything else we are doing. We have changed management in Finland. We reported now 1 or 2 quarters back that we are struggling in Finland. We don't really get the -- roll forward the price increases we got in. We are building a new structure in Finland. And we came to the conclusion that we need a different type of management going forward, and we have made an agreement. So we will now -- we are now in the search process for a new Country Manager in Finland. The revenue increased by 6.5%. It sounds more, especially since we in Q4 report said that it will be a poor quarter, the first quarter of 2022. But when Irene has described it a little more into details, it's nothing to write home about, if you take aside currency effects and like-for-like and so forth.

But we are happy we survived Q1 with the way we did, despite all. EBITA increased by 28% from 82% to SEK 105 million, and we have an EBITA margin of 5%. Cash flow for us, as other businesses, you've probably seen in this reporting season, dealing with importing goods. We are struggling a little bit. We had to pay upfront to suppliers, goods being stuck on ports and we have some negative development in the cash flow, which we are not worried about going forward.

If we turn to Slide 8 and, again, to emphasize, we want to be a fully integrated company. That's why we do all these things that we do. So from a customer perspective, we'd like to be strong in the relation with the customer, i.e., we'll not find our own brands in other channels. We have our own brands to make ourselves strong, facing the customer in our shops and so forth.

Our offering, we are focusing on consumables. We don't have any direct materials and service is an important part of our offering and increasingly so going forward. And our go-to-market model where we meet the customers wherever they want to meet us, and we meet them through our different concept brands. And in the future, of course, we'd like to have fewer concept brands. But the way we have them today, it works well, but a dream would be to have one concept brand per country, for example.

If we take Slide #9, the integration efforts, we have informed you step-by-step as we have done the integration activities, and they have been performed just according to plan. And we have the results that we have promised just according to plan. So the store integration as planned, we have only 4 shops left to this year and to next year. So now it's so few. So now it's integrated into our ordinary operational business.

The standard assortment is being rolled out. We have had some struggles, as you know, with the private brands, our own brands, depending on the transportation and freight situation. And then we come to 4 headlines, which are actually all of them going live in Sweden on Monday. So it's a big, big, big change taking place in Sweden on Monday, where we closed down finally the Alingsas from the Tools warehouse and moved the operations to Orebro, our highly automated warehouse. We will implement a new pricing system. We will do an ERP change, and we'll do change the legal structure. We merge Tools into Swedol. So there are 4 major things taking place on Monday next week. We have launched the common core values throughout the entire company. We have a value-driven management in the company, and that has been launched, as you know. And we have launched new financial and non-financial targets.

So if we turn to Slide 10. The first of the 2 slides, I said we will cover this time, specifically a little deep dive into the logistics structure. So in less than 2 years, we've gone from 20 to 7 warehouses. And as I just said, on Monday, we will be down to 6 warehouses when Alingsas is being finally closed. So after Monday, we will have one central warehouse in Finland. We will have one central warehouse in Sweden. And we have 4 in Norway, where we will, of course, if you look at the docks, we'd like to co-locate Skedsmokorset and Rosenholm. Neither of the 2 can -- has the capacity that we need for the Norwegian market. So those 2, we'd love to move to a new location and move together. So a lot has been done in the logistics area, which we haven't perhaps talked that much about, but there has been a lot of activities even there.

So if we turn to Slide 11, a little bit more information about our central warehouse in Orebro, which is our Swedish central warehouse, but in the structure we have, it's also partly a Nordic central warehouse. So it's the main hub for the whole group, but mainly the Swedish central warehouse. Modern facility, 28,000 square meters. We have extended it step by step with the building itself and also the Autostore, the automation system we have. And that's now been invested quite a lot to take the volumes from the Tools business. And if we look at the Autostore we have, so it's highly efficient. You can see the robots to the right in the picture.

We have now 90,000 bins, 92 robots. Those are the red ones you can see in the picture, 30 picking ports and approximately 1,000 goods received orders per day and approximately 13,000 order lines being picked today, being shipped out. So that's a quick -- we love someday to have one of these meetings physically and potentially in Orebro, but let's come back to that if it's possible to arrange one day.

If we turn to Slide 12, just quickly. We said we launched the financial targets that we launched, also the non-financial targets. So looking at the non-financial targets. So the responsible supplier relations, all of them should have to sign our code of conduct. We should have a customer satisfaction north of 75. We should have a sickness-related absence of less than 5%. A share of female managers above 30% and a climate impact, we've said. We will reduce carbon dioxide. To state that in figures, we need to know more what our carbon footprint is. We don't come up with any figures, which are irrelevant. So we said let's focus on reducing and we'll come back when we can quantify that.

So if we turn to Slide 14, I'd like to hand over to Irene.

[Irene Bellander, executive]

Thank you.

The first quarter has been favored by currency effects, an early Easter last year, but contracted by the strong Q4 with early winter sales. In addition, COVID-19 related sickness and increased uncertainty due to the war in Ukraine have hurt sales related to our small and mid-sized customers. Revenue increased 6.5% to reach SEK 2.1 billion, whereof 2.6% is related to currency effects and driven by the development of NOK and euro. Organic growth in local currency in the quarter reached 2.7%, driven by positive sales development in Finland.

EBITA increased by 28% to SEK 105 million in the quarter, corresponding to an EBITA margin of 5%. The improved profit is primarily driven by the Swedish business and relates to integration synergies and the good effect of implemented price adjustments. However, there are unfavorable mix effects in the quarter that contracts. First of all, there is a negative country mix and the growth mainly drives from Finland with lower margins, but also negative mix effects when it comes to product categories and customer segments. The intensive integration project between Tools and Swedol, as Clein mentioned earlier, is running according to plan. During the quarter, SEK 13 million was utilized from the restructuring reserve and the remaining restructuring reserves amount to in total SEK 140 million.

Turning to Slide 15. And let's have a closer look at the development in each markets. In Sweden, we had growth in the industrial segment in the quarter. Meanwhile, the uncertainty in the market has caused a general restraint among small and midsized companies. Higher fuel prices have, in particular, affected the transport, construction and the agriculture segments.

The EBITA margin improvement in the Swedish business is related to synergies, improving the gross margin, but also decreasing the cost base. Moreover, we've been able to implement price increases that offset supplier price increases and higher costs of freight. On the other hand, the quarter has been negatively affected by sales campaigns and mix effects.

The unfavorable mix effects are both related to product category and industry segments. For instance, high-margin sales of workwear decreased since we got part of that sales already in Q4. In Norway, we are not back to the 2019 sales level [ currency ]. And the organic growth in the quarter is close to 0. There was a slight improvement in the oil and gas segment, but COVID-19 related sickness has affected small and mid-sized customers sales negatively. We have a slight positive EBITA margin development and the integration between Tools and Swedol has created synergies, but an unfavorable product category mix, primarily related to workwear contracts.

We have a positive sales development in Finland. The organic sales reached about 10%, but profitability remained weak, mainly as a result of an unfavorable development in the customer mix and difficulties in passing on price increases from our suppliers. However, there are entities in our Finnish business with strong profitability. And with the new leadership in Finland, there will be a focus going forward on increasing the portion of small and mid-sized customers together with improved sales and assortment management.

Let me turn to cash flow. Slide 16, please. Cash flow from operating activities in the first quarter amounted to minus SEK 30 million, and is negatively affected by decreased accounts payable, prepayments to our own brand suppliers and continued build-up of inventories. The inventory build-up is driven by sales growth and the ongoing assortment merge between Tools and Swedol, but also increased focus on rolling out our own brands, implying higher volume purchase orders each time.

In addition to this, we are focused to ensure high product availability despite the disruptions in the global supply chain. The right-hand graph shows the development in liquidity and the starting period position of SEK 345 million at the end of Q4 last year, adding the cash flow from operations, deducting the impact of investing activities, a majority of which is M&A related, but also related to store and central warehouse reductions and IT-related investments. Finally, the financing activities, which are primarily related to the amortization of leasing liabilities, bringing us to the period end of SEK 40 million of liquidity at hand.

Slide 17, please. Alligo has been refunded during the quarter in connection with the spin-off of Momentum Group. The capital structure remains unchanged, but the funding conditions are somewhat more favorable. The group's net debt amounted to SEK 1.5 billion at the end of the quarter and the ratio of net debt-to-EBITDA amounted to a multiple of 2.0. And that is an increase compared to year-end, but still within the financial target range. On top of our liquidity at hand, we had unutilized credit facilities at the end of the quarter of SEK 1.2 billion.

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.

Handing it over to Clein for summary and outlook. Thanks.

[Clein Ullenvik, executive]

Yes. Thank you.

So our 4 overarching themes for 2022, we're trying to make it clear to all in our organization. Make our people grow, continue the coordination work and make sure that we deliver on all those ongoing activities. Get back on track with growth and focus on margin development in all parts of our business. And that is, of course, of the greatest importance to do, especially since we've been very much in a project phase for the last 2 years where we have a big delivery on Monday, as I said.

We have had a big chunk of our sales force spending in March and April, up to 30%, 40% of their time on different types of training. So now it's -- we need to launch all those activities and get back on the growth track and improve our internal work, how we work together and processes. So those are our 4 overarching themes.

Moving to Slide 20 before the Q&A. So we've done a lot of changes in our operation. We have prepared ourselves as good as possible. We feel we are ready for Monday with a new pricing system, new ERP system. We are relocating the logistics structure. We are still suffering and challenging -- and being challenged in the supply chain due to a situation in the freight market. It takes a lot more time. It's uncertain if you'll get deliveries. We have managed well. Am I totally convinced that we will not be affected in any way going forward? Absolutely not. So that is a challenge that we are continuously working with. We will continue to roll out the standard assortment and especially our own brands. If you look at our synergies and our activities we are driving, which are most of the value for us. It's the rollout of own brands that needs to work. And we'd like to find growth opportunities. We have the financial structure to be able to do so [ after that ]. So we need to focus on M&A. We need to reactivate our sales force again.

So then let's open up for the Q&A. Thank you so far.

[Operator]

[Operator Instructions] And currently, we have one person in the queue so far. That's Emanuel Jansson of Danske Bank.

[Emanuel Jansson, analyst]

Can you hear me, guys?

[Clein Ullenvik, executive]

Yes. We can hear you.

[Emanuel Jansson, analyst]

Perfect. And coming back to the country and the region for you in Finland, you said that you are changing the management in the country. Could you give us some color on the persons and what they have for kind of experience that will help the region to be hopefully perform better going forward?

[Clein Ullenvik, executive]

Sometimes it's like a football team. You need a new manager to create a new start. We'll have the Finnish spirit. It's a great fighting spirit in everybody there. But it is a new company there now compared to what it has been. And we need somebody to come out from the outside and then see that clearly and take the opportunities that we do have now to roll out a better shop concept, to keep the customers we have, but also continuously focus on small and medium-sized customers, roll out of the standard assortment, the Nordic assortment and also the own brands assortment in Finland. So the acting Country Manager now is our assortment and purchasing manager, Hakan Wanselius. So during his months there before we can welcome a new Country Manager, a lot of things will happen in the assortment side. Besides that, he is a very, very good sales manager. So it's well planned for and well executed, and will have a positive effect going forward.

[Emanuel Jansson, analyst]

Yes. Perfect. Sounds good. And I know you don't have it as a financial target or at least I don't think you have -- regarding the private label or private brands or own brands. Do you have any specific like, maybe not a target, but how much of revenue do you think you could steam from own brands going forward? I mean it's like 16% now adjusted for the divested operations, right?

[Clein Ullenvik, executive]

I mean let's pass 20% first and then 25% would be a very nice figure sometime in the future. So we still can go full speed. We had almost a problem in older days in Swedol when we had [ 2 ] big share of own brands, where our offer to the market is the best product available. So if the share would be extremely high, which would be a nice problem, then we need to look at our concept. But if we were to arrive at 25% sometime in the future, I would be very, very happy, and that will have a very good effect on our gross margin, of course.

[Emanuel Jansson, analyst]

Yes. Perfect. And have you been able to roll out the all other brands? Or how is the sourcing going from, I guess, from China or Asia at least?

[Clein Ullenvik, executive]

As we communicated earlier, we stopped the -- first, we delayed it and then we said, let's roll out Gesto shoes in Norway and Finland. So they get a little flavor of what we have in our portfolio of own brands that we have done. And now actually, we are rolling out workwear as well. But then for the shop sales, it's easier. I mean if a customer comes to shop and wants to buy a specific brand and our very skilled shop person says, why don't you buy Bjornklader trousers. So that goes quickly. But for bigger customers, bigger accounts, it's already agreed on, which brand and which color it should be. That takes a little bit longer time. So the bigger the customer, the longer the time to implement our own brands normally. Yes.

[Emanuel Jansson, analyst]

Yes. Okay. Sounds reasonable. And also going into the comparison between small, medium enterprises and the large customers, you said that the large customers in general in the industrial industry has had a comeback in this quarter. And is that mainly why the gross margin was reduced compared to the last period -- last year?

[Clein Ullenvik, executive]

Normally, you say mix effects when you can't really describe what's happening. But for us, country-wise, assortment-wise and customer-wise, we can see a positive development gross margin-wise in most of the different categories we have. But from a mix perspective, if you sell workwear with a high gross margin or Tools with a lower gross margin. And ss you know, the workwear portion of our sales Q1 has been lower, then you have a mix effect there. So -- and we see -- and I think you've seen that from most reporting companies that the industrial sector has a good speed. We can see that our industrial customers have developed nicely. Unfortunately, industry is not our most profitable customer segment.

[Emanuel Jansson, analyst]

And could you give us some flavor on how large chunk the large customers are in the total customer base?

[Clein Ullenvik, executive]

It depends from country to country. As you know, Finland, I think we have communicated, there you could have -- the top 2 customers are more than 12% of our sales. That is not a situation we would like to have. Traditionally, if we talk concept brands, traditionally, Tools concept brand has been industry customers, thereby larger customers, and the old [ Swedol ] brand was very much smaller customers, not at all bigger customers. And combined, it's very, very good. But in this situation, it's a bit challenging sometimes.

[Emanuel Jansson, analyst]

Yes. Good. And what was the gross margin when you were at Swedol before the merging -- merger?

[Clein Ullenvik, executive]

I don't know what's the peak gross margin. Irene, you remember?

[Irene Bellander, executive]

[45%].

[Clein Ullenvik, executive]

I was about to say [ 45% ] as well. Yes. But it's not possible to come back to that, but nobody knows. I mean it's a different company now. We have more -- quite a lot more, bigger than doubled. So...

[Emanuel Jansson, analyst]

I understand. And could you give us some more, maybe coloring on the small, medium enterprises? You said that there have been restrains to a certain amount, given the uncertainty with the -- in connection with the invasion of Ukraine and so on. Do you think this impact to be much more severe maybe in Q2 and going forward?

[Clein Ullenvik, executive]

A very good question, I would say. Interesting thing to see, I mean, we normally take pride in our small and medium-sized customers because many times, it's the Managing Director or -- and/or the owner of the business that are in our shops because you have a few employees or you are working totally on your own. But what was obvious now when the uncertainties in the world happen that those are the ones, of course, which are closest to the decision.

If I own my own business and I'm getting a little bit worried then, of course, I don't buy the new set of Tools or a full new workwear outfit as opposed to if you are employed by a bigger company and you go to one of our shops with more or less a requisition saying, then you don't think that much about your spending. But the smaller the business, the quicker they respond to uncertainties. So that was an interesting thing to see. But I'm not so worried about that in the longer run. What is more worrying is, of course, the increasing interest rates and then the pure fact that the inflation is -- at one certain point, I mean, our customers will -- there's been so many price increases that, of course, that in itself will cool down the demand unfortunately.

[Emanuel Jansson, analyst]

Yes. And then do you know how the inventory levels are at the customers?

[Clein Ullenvik, executive]

I mean we don't have -- we have these smart service solutions. So we don't have so much of that. It's more -- if they run their business, they have a need. Of course, they could stop and use the things that have a little bit longer. But at one point, it's broken, the Tools are broken or the workwear equipment is broken, so then they need to buy. They don't stock up much the consumables at least, except for smaller warehouses, but it's something that affects us much.

[Emanuel Jansson, analyst]

Yes. Okay. And just a last question from my side regarding -- yes, you're having kind of busy Monday coming up. And just regarding the warehouses and so on, you told us that you are -- you have 6 warehouses tests now, if I understood it correctly. You have 4 in Norway and you're looking into maybe have 3 in the future, is that correct?

[Clein Ullenvik, executive]

Yes.

[Emanuel Jansson, analyst]

Yes. Okay.

[Clein Ullenvik, executive]

Not close to each other. Of course, they could be co-located. But the biggest step we need to take is being done on Monday at [ signing sources ]. The second biggest step to take is when we move together, there was a [ whole another place for caution ] business to a new premise one day in the future. So when that is done, then we have a really, really good logistics set up. Then of course, we have also said that we're not happy with the central warehouse we have in Finland. It's too small to cover the business already as it is today and what our plans are for Finland is, for sure. No, it doesn't have that capacity.

[Emanuel Jansson, analyst]

Yes. And I guess it's based on the -- also the landscape in Norway, why you need more warehouses than in other regions?

[Clein Ullenvik, executive]

Yes.

[Emanuel Jansson, analyst]

Well, I think that was all the questions from my side. Thank you very much for answering them.

[Operator]

[Operator Instructions] Okay. There seems to be no further questions from the phone at this time. So I'll hand back to our speakers for the closing comments.

[Clein Ullenvik, executive]

Thank you very much for dialing in. We know there has been a press conference simultaneously, National Bank describing the interest rate increase. But thank you all for tuning in and speak to you next quarter. Take care. Bye-bye.