“Our concept has been successful for more than 100 years, which shows that, despite industrial development and fluctuations in the economy, a link between manufacturers and users is required – as long as it adds value.” - Johan Sjö, Former CEO of Addtech
There are a unique group of companies in the Nordics that share a heritage that dates back to 1906. During the 1890’s, Avid Bergman and Fritz Beving were working in Germany and England in the midst of the industrial revolution. This experience led them to foresee further rapid industrialisation in Sweden. But there was one problem: industrial suppliers didn’t have the local knowledge to sell into the Nordics. In 1906, the two founders created Bergman and Beving (B&B) as the first importer and agent for foreign manufacturers to sell industrial products to Sweden. Over 100 years later, this heritage has created four listed companies that manage hundreds of operating subsidiaries with over $10bn in enterprise value.
Bergman & Beving started as a trading company. They would source industrial goods from foreign companies to resell in Sweden for a distribution margin. After World War 2, B&B signed a deal to sell the electronic measuring instruments of Danish firm Radiometer. This was the first move into ‘value-added distribution’. B&B would now not only sell the products but also provide technical services and training to the end users. By the late 1980’s B&B had grown to over 55 subsidiaries that it split into three companies: Addtech, B&B, and Lavercrantz. In 2016, Addtech spun out the Life Sciences division to merge with Mediplast and list in Stockholm. Today, Addlife is worth 30bn SEK and Addtech ~40bn SEK.
The Bergman & Beving heritage is built on a set of values with ‘responsibility and freedom’ at the core. Addtech, Addlife, and the other listed entities from B&B’s legacy are holding companies of hundreds of operating subsidiaries run in a decentralised manner similar to Berkshire or Constellation Software. Addtech provides clear instructions to operating companies: ‘do what you should, how and when you want - but keep the deadline and explain all deviations’. Accountability is pushed as close as possible to the front line to empower employees to act as owners.
Value-added distribution is particularly attractive in the Nordics for several reasons:
"You therefore have 26 to 28 million people. You have different languages so for companies coming from outside, if they are going to be able to establish themselves in a region like that, I think it’s very complex. You need to have a critical mass; you need to have the countries if you are going to be successful, because you also need to translate, for example, the manuals and so on. In some cases, you need to answer in the local languages. It is quite complicated to establish that business if you do not already have a Nordic setup or a Nordic organization."
Value-added distributors are effectively technology partners that help customers find the correct solution for their problem. They build deep relationships with customers which typically leads to opportunities to sell private label products to solve the niche problems suppliers are not addressing. Addtech generates ~33% of sales from private label products. There is an interesting trade off between being a more flexible, distribution-only business versus taking more inventory risk and producing your own products. Addtech and Addlife have a long history of selecting the right niche businesses to build or acquire to fill in the gaps in the distribution business. This combination of distribution and own-products adds more value to customers and drives higher margins.
Addlife listed in 2016 and is a ten bagger in 5 years. The company is a collection of ~30 Labtech and Medtech distributors and suppliers. The Labtech division has 80% recurring revenue from reagent sales and ~30% of the Medtech division is private label products. This partly explains why Addlife enjoys 15% EBIT margins compared to Addtech’s 9% at Addtech. Also, the Former CEO of Addtech Life Sciences shares how the structural organic growth within healthcare drives more opportunities for medical relative to industrial distributors:
"The healthcare industry has still got better pricing than the industrial business, for example, where you have more competition. In the healthcare industry, you also find ways to increase your profitability. For example, you have organic growth that can be very favourable if you have a tender business. If the customers have committed to 100,000 samples per year and you have placed equipment with them, very seldom do they take into consideration that the population is increasing and you are going to have an organic increase of maybe 4% to 5% per year. If you take that incremental for five years, then your gross margin is going to increase because every new sample that you sell is going directly into your pocket. The leasing that you have calculated for the instruments is based on just the original 100,000 tests that you sell. If you sell 120,000, that means that for those additional 20,000 tests, you get the full gross margin directly into your pocket."
It's also interesting that the Bergman & Beving companies all use one key metric:
Profitability Target = Net Income / Working Capital
Addtech targets 45% for this metric which can be used as a proxy for return on capital invested excluding goodwill for distributors. The metric includes five variables: sales, net margin, inventory, receivables, and payables. This comment really stood out on what drives long term sustainability in profitability:
The only parameter that you can increase to infinity is the sales. Out of the six parameters, everyone in the company understands that it is the sales that is going to really make the difference, because you have a commercial organization; I think that is very central. Also, if P divided by WC is bigger than 45% then the business will be self-financing and you will have a profitable business.
Sales is the only metric that can theoretically be increased forever. This reminds us of the study that shows how hard it is to sustain high organic growth compared to a high ROIC. Of companies growing above 15% between 2000-03, only 26% were growing above 15% after 10 years. McKinsey also concluded:
‘Given the natural lifecycle of products, the only way to achieve consistently high growth is to consistently find new product markets’
This highlights why roll-ups with great capital allocators like Mark Leonard, Nick Howley or Johan Sjö at the helm are so attractive. By definition, they find new product markets via acquisition. What makes Addtech and Addlife interesting is that the target companies for acquisition are very small. On average, the targets are 100m SEK in revenue with fewer than 50 employees. The smaller the company, the better the price and the easier to deploy the B&B culture.
We will continue coverage of the B&B ecosystem with a focus on both Addtech and Addlife. Let us know if there are any similar companies with a unique history and great performance that would be worth exploring.