Alligo AB (publ)

Okay everybody, welcome to Aligo Q2 Report 2024. As always, our presenters today are Irene Risenborg Melander, our CFO, and myself, Klein. And we many times say that it feels that time flies so quickly that we do not do much more than having these quarterly presentations. It's starting to feel that we would like time to fly even faster into a time when market is picking up quicker than we can see today. So sometimes you like the time to fly a little bit faster. We made jokes earlier that we could present any of the old quarterly reports because the situation is very much the same. The market is still slow. We are taking actions on whatever we can take actions. We are running cost reduction programs. We reduced some hundred million SEC so far. We are running capital reduction programs. We are maintaining our margins. We are running all different types of sales initiatives. So we could have taken more or less any of the last two, three, four quarterly reports and the story would have been the same more or less. We have one big challenge that is that we have a mixed effect, which is quite severe where industry segment customers are growing. And other larger customers are growing and our beloved small and medium sized customers are struggling. So that we are focusing on and it will come back. It's not there yet. But there is one change compared to the old reports is that we have now hit the throttle concerning acquisitions. So as you can see, we have made seven acquisitions during the quarter. to compare with the sixth acquisition for the whole of 2023. So we see good opportunities to do good acquisitions at the reasonable price point for well-run businesses. The agenda for today, you can see, and we are going to do the same thing as we always do, bringing up some highlights. We're not going to go through the report in its entirety. There are many companies reporting today and tomorrow, so we will keep this speed up. We always have a theme, and we have logistics, assortment, sustainability, acquisitions, customer strategy, and so forth. Today, it will be one theme, which is two slides on purchasing. But Aligo, only one slide, you know it. We have been struggling to get about 10 billion SECs. As I said, the market has not been helping us much. I would have hoped that we by now would have been above 10 billion, but not yet. 2443 employees and 210 stores and looking at the stores is also a little illustrates something when we we said that we were surprised how well we could mitigate a slower market in 2023 by reducing costs and of course that it would then be easier if we had 240 or 2443 employees at the same place and continue to reduce. But we are spread out in different central warehouses and in 210 stores. So it's not as easy now when we look at Plan F in cost reductions. We have done B, C, D, E. It's difficult to continue to cut costs, at least employee-related costs, in direct proportion. And we don't want to ruin anything. We want to be prepared for the market upturn. So just as a little comment. And the main brands we have, as you know, is Sudol in Sweden, Tools in Norway and in Finland. We can go into business conditions during the quarter. Continued weak market, especially for the construction sector, especially for the small and medium sized customers. There's a stable demand in oil and gas in Norway. I think we as a management team do whatever is possible to do, running different sales initiatives. We do acquisitions. We run cost reduction initiatives. We try to fine-tune, as you know, we have talked about that earlier, to find the right price point for different assortments to continue to be relevant for the small and medium-sized customers. We don't want them to move to other suppliers because of price. So we have actually lowered the price in certain areas and tried to compensate by increasing price in other product areas. And we constantly reduce our inventories. And we will continue to do that. We have a good delivery capacity. We've had some disturbances in the quarter, starting up the Vespi central warehouse. You know, we've merged the two warehouses we had to one location outside Oslo in Vespi. there's some extra cost related to that and some delivery disturbances as many times when you do those type of things and the macroeconomic factors i don't need to mention i think you know them better than i do so in in brief not stealing your thunder iran but the revenue some 1.8 percent up but organically it's 3.2 down And the 1.8% up is more or less that extra day we had in this quarter. Remember, we had a negative easter effect in Q1 and with less trading days. And now we have one day back in this quarter. So if you adjust for that, it's flat. It's probably zero in growth. Operating cash flow a little shy of last year, fully explained by the lower EBITDA. and adjust the limit on margin down from 8.4 to 6.8. But we continue to navigate. We think nicely in the customer segments and keeping the margins up because that is something we can affect and we try to do that and I think we've done okay so far. So highlights, as I said, seven acquisitions. totaling some 300 million in annual turnover. What is specifically found is that two of them were welding companies. We have taken a grip of consolidating the welding market in Sweden and in the Nordics, but especially in Sweden. So those five welding companies total some 250 million in sales, and by that they are Approximately doubling the welding sales that we had in the old Aligo before these acquisitions The warehouse emerged in Norway that talked about and had some some startup costs and We are looking forward to the to the east to the autumn where we're going to launch the slot where a clothing brand with a low little lower price point a little a less features on it compared to our stronger brands that we have. And that's 1832, sorry. And smart wear is the laundry and the sewing concept that we've rolled out. We will also be launching other brands, ProWell, for example, for hand tools at a little bit lower price point. to be more relevant for the small and medium-sized customers. So it's not the sales of the product as such that is going to change the world. It's the perception of all the tools having a product in a certain price range. That will be the big thing. So two slides on purchasing, as we said. And you know how we run this. We are very centralistic. We set the assortment. We select The supplies we'd like to work with, they do tendering and we get, we think, pretty decent conditions. So by doing that, we can ensure that we have the right offering and we meet whatever the customer's needs could be. And working closely with the supplies is also a way for us to arrive at a decent stock level going forward. Yeah, we have a better control over the flow, we get better negotiation powers, and we can take better responsibility throughout the whole sourcing chain. So since this journey with the merger, we are half as many suppliers and we are some 65% less articles. So looking at the old tools, all those articles, that has been cut dramatically. And we will continue down that line. So responsible sourcing, I think I mentioned it before, but it's fun. I was in China a couple of months ago, and I'm so super impressed with what our colleagues have been doing for 10 years and see the partnership we have with the factories there. So we have together developed Ten years ago, one of our colleagues went to Tangshan, for example, to one plant. We didn't produce anything there and the journey started. We started with simple products like trousers and now they are on the more advanced products like winter jackets and overalls. We represent 70% of their turnover and they are running a very professional business with high sustainability targets and to see how they contribute to the local communities is super impressive. So it's interesting to see. I visited, as one example, the 1832 plant in Wuhan. And it's also nice to see where actually our products are being produced. So super impressive what our colleagues have been doing for a decade in different countries, China, Laos, Bangladesh, Pakistan, and so forth. And we have just started that journey. So, Irene, some financials.

Yes, thank you. As Clay mentioned, the slowdown in the market demand continued as expected and mainly affected small and mid-sized businesses. Revenue increased by 1.8% in the quarter, and this was mainly due to positive calendar effects from E3-Q1, particularly in Norway. Equifixion had a positive impact of 3.1%, but couldn't compensate for negative organic growth of 3.2% related to Sweden and Finland. The negative organic growth has been consistent at around 5% in Sweden since Q3 last year, and about 12% in Finland since Q4 last year. 166 million compared to 201 million last year. And the results were weaker in all markets, but primarily in Sweden, which has the largest share of SMEs. The EBITDA margin reached 6.8% and the decreased profitability resulted from weak demand and pressure on margins driven by negative customer segments and size mix, partly mitigated by tough testing measures. The cost savings amount to around 100 million SEK annually and are primarily related to personal expenses. On this slide, you can see how different parameters affect the trading gross margin. And we continue increasing the share of sales related to our standard assortment in each market, and that positively affects margin. However, due to the significant unfavorable customer segment and size mix, there is a contribution margin pressure in Sweden and Norway. However, we uphold our margins on Sweden's relatively more profitable small and mid-sized customers. And if we look into the customer segment, the most significant drop in sales in Sweden is within the construction customer segment. And in Norway, the oil and gas segment continues to develop well, and both of these effects hurt our margins. On the other hand, we have a favorable customer segment mix in Finland, where the most significant drop in sales is related to manufacturing. Sales in Sweden were in line with last year. Organic growth was negative at around minus 6%, contracted by one additional trading day and exhibition. The weak organic growth primarily affected the SMEs, while some larger customers, such as those in the distance and energy industry, had a positive sales trend. EBITDA ended at 129 million, which is behind Q2 last year, and the weaker result is due to weak volumes and margin pressure following the negative customer segment and size mix, while cost savings somewhat mitigate the effect. When it comes to Norway, sales increased by 12.4%, and there was a rebound following the Easter holiday in 2021. Organic growth reached 80%, driven by a continued strong market in the oil and gas customer segment. EBITDA decreased from 29 to 26 million, and the weaker results related to margin pressure due to an increased share of sales within oil and gas. with relatively lower profitability, in addition to startup costs in the logistics center in Vestby. When it comes to Finland, sales decreased by 7.4%, including acquisitions, and the clear slowdown in the manufacturing industry in 2004 continued, and organic growth was negative at 12%. When it comes to operating cash flow, it counted to $270 million in Q4, which is slightly behind Q2 last year due to lower EBITDA and increased trade receivables. Increased trade receivables is due to higher share of larger industrial customers with longer payment terms. And the inventory levels actually decreased in Q2. The first six months investing activities related to M&A activities of 185 million, completing six completed acquisitions, and also investment in non-current assets of 61 million. The capex to depreciation ratio among the two multiples of 0.9, which aligns with our long-term target levels. And finally, the financing activities are related to increased borrowing, amortization, releasing liabilities, and dividend pay. Net theft at the end of the period was 1.7 billion, an increase from last year due to server-completed acquisitions, increased dividend payments, and decreased operating cash flow. Ratio of net theft to EBITDA was multiple of 2.0, which is higher than last year, but well within the financial target range. Unutilized credit facilities, including cash, amounted to $1.2 billion. And as you know, our covenants are relating interest coverage and equity asset ratios, and there's good headroom before reaching those thresholds. So in summary, we have a solid financial position, and we will continue to invest in organic growth and think advantage of good M&A options in the market. Sending it over to you.

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

Exactly.

So it's not that we have fiddled away a lot of money. We also increased the dividend and by that it made 1.10 also in the debt ratio. Just as a little fun fact. So summary and outlook in this hyperspeed presentation. So it was an acquisition intensive quarter as we said and we will continue to do acquisitions we think we have a very nice platform to dock on we think that other areas to step into could be potential growth new growth sectors so we will continue to do acquisitions and we are focusing on sales assortment management workwear especially We are almost unbeatable when we get our ducks in a row in our workwear offer. We do constantly price adjustments to be relevant, not being perceived as too expensive. So coming back to a smarter pricing that we used to have back in the days. We're closer with our suppliers. We have a good history of doing that with competence days and running these different sales campaigns. And we will continue with our logistics structure with having one central warehouse per country. We have a good delivery capacity. So we are well positioned. We are ready. We will be even more ready when the market returns. We will do that from a lower cost base. We'll do that. with even higher sense of urgency to make success. We made a lot of plans before the vacation period to be able to hit the floor running in the autumn. So even if we don't foresee that the market will turn up crazily in August, September, but we will do whatever is possible for us in the existing market, at least, that you can be sure of. And then our own brands, the ones we have and the new ones we will launch, will contribute nicely. And we are aiming to set the climate targets in line with the SBTI. So, very good. That's all from this presentation. What do you say, Melanie? Should we head to Q&A?

Thank you. As a reminder, to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. If you wish to ask a question via the webcast, please type it into the box and click submit. Please stand by while we compile the Q&A queue. Our first question comes from the line of Emanuel Janssen from Danske Bank. Please go ahead. Your line is open.

Good morning, Klein and Irene. I hope you can hear me. Perfect. Thank you for a good presentation. I just have a few questions here from my side. I think we can start off with the With the customer or channel mix and the gross margin, as you mentioned, it's been quite a challenging customer mix for you in recent quarters. I think that you are still able to maintain a healthy gross margin, and I wonder if it's possible somehow to maybe quantify the effect in this quarter from this customer or channel mix.

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

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

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

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

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

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

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

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

Exactly. Of course, we will need the help of the market to make this a super success. It will be at the end. we have a lot to do on our own to be more active up in the market and make sure that all these initiatives that we are launching are getting the planned effect. So a lot of our future success is in our own hands. I shouldn't mention anything, but if you look at the competitive landscape, I'm not super worried that we'll be run over by anybody. We have a very good position in the market And we will continue to grow on that. But then, as you said, when will it turn up? And as I said initially, sometimes you like to fast forward life a bit. And I'd like to fast forward it to when you can see the market turning up. But in the meantime, we will find you whatever possible to be ready when the business turns up again.

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

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

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

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

Perfect. That's very clear, Klein. I think that was all my questions for now. So thank you very much for taking my questions, Klein and Rian, and thank you for a good presentation. Thank you, Manu. Enjoy the summer.

Thank you. We'll now move on to our next question. Our next question comes from the line of Karl-Johan Bonnevier from DNB Market. Please go ahead. Your line is open.

Yes. Good morning, Klein and Rian. A couple of questions to add to the ones already asked. Looking at the Vespi consolidation, could you maybe elaborate a little on how much extra cost you saw that hitting the quarter with, and do you feel that that structure now is in place going into the second half?

Did you say debt reconciliation?

No, the Vespi consolidation. the Norwegian new warehouse.

We were pointing at each other. That's an issue for you. The question was how it's running now.

How much extra cost you saw that consolidation hitting the quarter with and then all is in place now.

A number of millions. Single digit number of millions as because you take in more hired persons, they work overtime, they work weekends, and costs tend to increase a lot. So a number of millions, so it's not tens of millions, but it has cost us, absolutely.

Related to temporary employees. Absolutely.

Hired persons, blah, blah, blah. So, yeah. And you feel that those costs are now behind you?

Good question. The main part, yes, now everything is within those four walls. So the transformation of moving things from the old Rosenholm, that is done. But then the efficiency is not there yet. So there will be some additional cost, I would imagine, but it should only be lower than what it is today. We are making some changes also in the management of the central warehouse. But they need to focus on their processes and get things in order and everybody is on top of things as we speak.

So back to normal optimization basically.

Yeah.

And just pick your brain a little more on the outlook for the second half and this year and into 2025. It would be interesting to hear if you see any green shots out there. I guess Finland and manufacturing was early into the down cycle for you and most likely the one that could be quickest out. Are you getting any kind of indication from that? You're good.

From a larger industry, as you said, it's fun because there was an exact date that it stopped on November 16th last year. It was a full stop. You could hear the Big part of the industry segment in Finland coming to a stop. There we hear signals that they are planning for a higher production output in the autumn. So you are very spot on. And then I don't know if it's psychologically that you look for all positive news, but it feels like the customers that we talk to that it feels a little bit more optimistic. We can't see anything in the figures and it will be no dramatic after. We've never said it will be. we still don't believe it we hope to see it during a second half year but talking to customers it feels more positive and if the interest rates continue to go down uh who knows if we talk about sweden we could see potentially a little positive effect about the route tax deductions and our even higher activity out in the market we we are we need to plan for bad days but we we hope for or positive things, and we hear more positive signals in the market now, but we don't see it in the sales yet.

Jan, I guess when you look at the construction confidence indicators, they seem to be turning slightly less negative, at least at this stage, and I guess forecasts going into 2025 looks very supportive, so maybe that's a question for 2025, you think?

Exactly. We'd like to see. We hope. We've said that the whole time, and I think most other companies in our type of sector say the same thing, that it needs to happen sometime during the second half. Nobody really knows. But we've said that our, especially the small and medium-sized customers, as you know, we've said so many times, they are very quick to respond to downturns. Normally, they are reasonably quick to respond to upturns as well. Because they don't start up a new super project. They start feeling that their order books is filling up and then they're more or less back in business again. So normally they should be quicker to turn up. We don't have to wait for a new NCC, Skanska JM project to be launched. They are normally quicker to respond to an upturn.

And I guess is it a fair summary of what you see out there for the moment that it is rather stable?

Yeah, you were disconnected there, Koi.

Sorry, I have somebody calling in on the line here. But take it again. If you look at the summary of the demand situation out there for the moment, is it more of a stable demand on a low level or do you see spots that are weakening for you?

No, it's stable.

Absolutely stable.

And day by day, hour by hour, we follow sales and all the lines being picked. So we are super sensitive to anything. Then June was difficult. We had a feeling that as we can have the feeling sometimes, let's have vacation now and let's hit the floor running in August. There was some signals for that from the customer base. So yes, stable, absolutely. But we will be happy to signal when we see the market coming back.

Sounds good. And on the position you're now taking in the welding market, can you give us some sort of KPI of what kind of size you see that that market has and what kind of say even the particular market share you have in that segment with these kind of positions you've taken?

Exactly. We are inviting all the companies that we have acquired as soon as possible after vacation. And by then we should have a better, it's a number of billion sec. It's not a 10th of billions sec in market value. But as welding as such, we are already at a fairly big chunk what we had and what we have acquired and what we will acquire. So we will be the leading player in the welding sector. What is especially fun is to see what we can do with it because we don't buy them only to continue to say welding because the fun thing happens when you can sell to the welding customers all of our other assortments from workplace equipment to this special PPE and work where you need for welding. There are grinding and drilling. So a welding customer, their need fits very well into the product offer we have. So I'd like to make that a super case to show what can happen when you first consolidate the market, which is a positive effect. But then I think the real fun starts when we can prove what we can do with it. and also looking at the supplier side, because they are today buying when we can coordinate their purchasing and we can bring on our way of running supply and purchasing. We will come back to that, but it will be super interesting. And it's also fun to see how resilient they have been in a tough market. So I don't know if it's luck or if we have been good in some analysis somewhere, but the welding companies seem to keep up well in this tougher environment. So we'll come back and present it step by step when we do things with these wonderful companies.

Excellent. I'll remember to ask the question again at the Q3 stage. And just a housekeeping question as well. Looking at the impact of IFRS 16 on the financial cash flow, how much was that in the quarter and in the half year?

Yeah, it was 108 in the quarter and 108 for the first six months.

Sorry, for the first six months, 189. Thank you very much and all the best out there. Thank you. Take care.

Thank you. Thank you. There are no further audio questions at this time, so I'll hand the call back to Klein for any other questions.

And we have checked the mail questions, and there are nothing which we haven't already answered. So thank you for all the questions. So some closing remarks. As you know, we think we are taking the actions necessary in a tough market environment. We have good self-confidence. We've done it before. We will do it again. But we need a little bit of help from the market going forward. Our model is clear. Our direction is super clear. and we've said we are ready to do more acquisitions as we did in the quarter and we will continue to do so and as we normally also say we are one quarter closer to a market upturn every quarter we put behind us at least even if it's starting to feel a little bit boring we're getting one step closer to a market upturn so the journey continues I hope you all will enjoy the summer when that comes And thank you very much for listening in.