Dustin Group AB

STO:DUST

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Q1 report 2019 conference call. [Operator Instructions] I must advise you that this conference is being recorded today, Wednesday, 9th of January 2018.I would now like to hand the conference over to your speaker today, Mr. Thomas Ekman. Thank you. Please go ahead, sir.

[Thomas Ekman, President, CEO & Acting VP of Supply Chain]

Great. Thank you, operator. Good morning, everyone, and happy New Year, and most welcome to our first quarter presentation and conference call. Hope you all have had a good morning. Here on our side on the call is myself, Thomas Ekman; Johan Karlsson, CFO; and also Fredrik Sätterström, of course, in the room as well.I'm very happy to present our first quarter of our year where we see a strong performance in all areas. SMB continues to perform, and LCP is back on positive organic growth. Also, our completed rights issue will also allow us to continue our acquisition strategy in the Nordics as well as, of course, in the Netherlands. But let us come back to dig this further on in our presentation for that.So let's go to it more in detail, going to Slide 2, Dustin at a glance. Many of you know us, of course, but for those of you new in the game, Dustin is a leading IT e-retailer with a wide range of hardware, software and related service and solutions. We have a centralized warehouse and efficient logistics platform to ensure fast and reliable delivery to our customers. With the addition of high level of IT expertise and competitive pricing, it enables us to meet the needs and demands, so primarily small- and medium-sized businesses, but of course, also large corporates, the public sector as well as consumers.94% of our business is B2B and 6% is B2C. Just a little less of half of our sales comes from Sweden; and the 15%, 16% comes from Norway, Denmark and Finland, respectively; and now 4% from the Netherlands. We have roughly 255,000 products both for hardware and software in our assortment, and 80% of our sales is coming from online. The remaining 20% are sold through our strong relationship sales forces.As you also can see, our average orders size is around SEK 11,000 for public and large contracts, and SEK 7,000 for SMB. And of course, that is in the LCP, we see that larger order sizes as well as pricing effects in the different categories. Overall, Dustin is -- we are very well positioned in a growing market and are benefiting from underlying trends such as an accelerating online market, the strong growth in mobility, managed services, security, cloud-based solutions. So that is a short of Dustin.Moving on then to Slide 3 for some highlights during the quarter. Strong growth and improved margins is a good summary of the quarter. Net sales increased 21%, fueled by completed acquisitions and organic growth in all segments. Our Large Corporate and Public segment shows positive organic growth at 4.9%, and SMB growth organically in line with our financial targets at 7.8%. Consumer sales were also up 2% organically. So in total, we had an organic growth of 5.9% for the group.We also saw a good growth in gross profit at 17.4%., and our adjusted EBITA rose 24% to SEK 162 million compared to last year's SEK 131 million. And this gives us an EBITA margin of 5.2% for the quarter. The margin improvement is mainly due to acquisitions and the more favorable sales mix with an increased share of advanced products, services and solutions and also a relatively higher share of sales in the SMB segment. And also, our private-label sales, like cables, adapters and so, made a positive contribution in -- to the margins during the quarter.Later in the presentation, we will come back to the technicalities behind the gross margin increase to -- so get more insight in that. And earnings per share, I can say also here, increased 41% to SEK 1.38 per share. And as a consequence of our rights issue, our net debt ratio is now down to 2.Other operational highlights during the quarter worth mentioning is also that our new organization, our new recruits are implemented, so we are now up to speed with that.That was just the top cover. So Johan, we will be moving on to Slide 4. Can you take us through the segment a bit deeper?

[Johan Karlsson, CFO & VP Finance & Business Support]

Yes, let's start with the SMB segment in some more detail then. In the quarter, we saw very strong growth in the SMB segment. And in total, revenue increased by 33.4%, of which 7.8% was organic and the rest came from acquisitions and FX rates. The organic growth was good in all countries. And particularly, the Vincere acquisition in the Netherlands added to the non-organic growth. The segment result ended at SEK 161 million compared to SEK 122 million last year. This represented an increase of 31.8%. Segment margin was marginally down from 11.5% to 11.4%.Product mix in comparable units continued to improve and continued -- and contributes positively to the margin. It is particularly satisfying to start reporting on the software and services sales share of total sales as this is a good indicator of our move towards a more service-oriented organization. The share of software and services sales within the SMB was up from 14% last year to 20% this year. Part of this increase comes from the Software-as-a-Service offering where we increased from 33,400 users last year to 55,615 users this year, an increase with 67%.The Vincere acquisition contributes to the EBITA margin of Dustin in a positive way. As it is not integrated and hence not part of the central platform, we allocate all costs of Vincere to segment result, i.e., segment result equals EBITA. In segment results for SMB, this means that Vincere has a slightly negative impact on the segment margin in the quarter.Moving on to Slide 5 and the LCP segment. Finally, we are back to organic growth in LCP, as Thomas mentioned. As we've said before, this business is volatile between the quarters and years depending on large rollouts and agreements. Now we can see the effect of the large deals made in Denmark and Sweden late last fiscal year. At the same time, we see good progress among the larger corporate customers where we grew by 16%.In Finland, we still face fierce price competition and continue to focus on maintaining margins, which in some cases has effect on volume. Segment result was up from SEK 89 million last year to SEK 99 million this year, resulting in a segment margin of 6.5% compared to 6.6% last year. The main reason for the reduction in margin is the initiation of the new contract in Denmark.Moving further to Slide 6 and the B2C segment. Sales grew in total by 4.4%, of which 2.0% was organic. Sales was strong, particularly in Denmark and Norway, and total sales was well supported by the Black Friday campaign. Price discipline has been good during the quarter in general and through Black Friday in particular, resulting in a segment result of SEK 11.5 million compared to SEK 7.9 million last year. Segment margin was up from 4.3% last year to 6% this year.Moving on to net working capital in some more detail on Slide 7. In total, net working capital ended at negative SEK 22 million compared to negative SEK 198 million last year. If you'd look at the building blocks in more detail, we see for accounts payable, they are still high due to the temporary favorable credit terms from some distributors. The effect is, however, lower than last year due to a different supplier mix this year compared to last. Accounts receivables moved basically in line with the increased business volumes, and we see no change in credit terms year-over-year.Inventory is SEK 125 million higher than last year, mainly as a result of increased volumes and assortment in the private-label category as additional stock in the acquired entities in the Netherlands and slightly higher customer-specific stocks to serve larger customers. All in all, net working capital is still negative SEK 22 million. And corrected for the longer payment terms from some distributors, we're still at the previously communicated 1% level of sales.Moving on then to Slide 8 and cash and CapEx. Cash flow for the quarter was SEK 563 million positive compared to SEK 117 million last year. Looking at the difference against last year in detail, we see that cash flow from operating activities was up from SEK 81 million last year to SEK 106 million this year, mainly due to higher profit. The effect from change in working capital was negative by SEK 530 million where the main differences comes from the accounts receivables due to increase in business, the new acquisition and higher inventory levels coming from mainly from what we have discussed before.No acquisitions were completed in the month, while cash from investment activities were positive by SEK 283 million compared to last year. After rights issue was completed during the quarter, cash from finance activities was positive by SEK 668 million. All in all, a positive cash flow of SEK 563 million.CapEx was at SEK 22 million for the quarter or 0.7% of sales. This was SEK 14 million higher than last year where the main differences came from more investments in the IT platform. This is a result of more effort put into improving the online platform at the same time as we broaden the platform to also handle service and solution sales. Further to that, we see some investments in production equipment such as servers in the new service and solution entities.Moving back to Thomas.

[Thomas Ekman, President, CEO & Acting VP of Supply Chain]

Great. Thanks, Johan. And moving on then to Slide #9 and just to revisit the fluctuations that we have shown before that we see in our LCP segment and how we drive our sales to minimize those going forward. As you know, the fluctuations here are driven by the available public frame agreement. And as we've explained before, we are hesitant to drive volume over margin and we have a selective tender strategy.Now public sales, down for 2/3 and corporate for 1/3. And our intention is, of course, to equalize the share to -- in order to mitigate the fluctuations. Growth in the corporate segment in the quarter was 16%, which is good. And the total organic LCP growth, as mentioned before, was 4.9%. And during the year now, the framework agreement in Denmark will be a driver of growth in the public segment alongside, of course, with our continued growth and efforts in the corporate segment in the LCP segment.Over to Slide 10 where we show -- I want to show you more of a conceptual picture of our ongoing journey where we, primarily in the SMB segment, strive towards managed IT for our customers. And usual case for us, it starts by selling and deliver hardware. And with that as a foundation, we add on services and solutions to that. The more we do so, the more we drive share of wallet in our customers, and that increases also our gross margin. At the same time, we also provide our customers with sustainable and efficient IT solutions.For the LCP segment, we focus on deliver IT product and to some extent, of course, also implement IT, which can be, for example, product and services such as configuration, for example. But for the SMB segment, we strive towards going the full way towards the managed service solutions for our customers.And going further then to Slide 11. Our journey has also shown, as Johan mentioned before, in an increased share of software and services where we now see a good development in growth. 14.3% from last year in the SMB segment was the share, and now it's up to 20.3% share of software and services within the SMB segment. And I should just also mention that in our full quarterly report, you can also see a deeper breakdown on these numbers that we give even more insight on this and that -- there you can see how -- the trajectory of our strategy going forward. The increased share of service sales also has a positive impact, as mentioned, on our gross margin. And that, as mentioned before, increased 2 percentage units this quarter to 17.4%.And I think, Johan, on Slide 12, you can give a more in-depth description of the technicalities behind this increase of the gross margin for everyone's understanding.

[Johan Karlsson, CFO & VP Finance & Business Support]

Yes, it's a short attempt to explain how the dynamics works in the P&L structure when we are adding more and more services sales towards the normal Dustin hardware business.So first, what you can see on the right-hand side is that the gross margin from services is significantly higher than the gross margin that we have on the hardware side, so we will have an increase in gross margin coming from that. But at the same time, sales and delivery costs of services is higher than what we have from the basic hardware. So part of that higher gross margin will be mitigated or corrected by higher delivery costs coming from the service sector. All in all, as you can see, we still see that service and solution offering contributes to the EBITA margin of Dustin in a positive way.Looking into the future, we see that the opportunity to improve efficiency in the delivery and sales of services is significant. This means that this will be done continuously as we are integrating the units into the Dustin platform.

[Thomas Ekman, President, CEO & Acting VP of Supply Chain]

Yes. Good. Thanks. And then over then to just summarize the quarter. It was a strong quarter with strong growth and increased margin where net sales were up -- rose to 20.6% to SEK 3.1 billion. Organic growth for the group was 5.9%, where SMB were up 7.8% and LCP back to growth at 4.9% and B2C grew 2%.Gross margin, as mentioned, up to 17.4% from last year's 15.6%. And our adjusted EBITA margin came in at 5.2%, positively impacted then by the higher gross margin, of course, and a more favorable product mix between our segments. And finally, earnings per share increased 41% to SEK 1.38 compared to last year's SEK 0.98. So all in all, a strong quarter with good margins that's filtering down to a good and strong profit.And this concludes our presentation, and we are happy to take any questions you might have. Thank you. Operator?

[Operator]

[Operator Instructions] And your first question comes from the line of Predrag Savinovic.

[Predrag Savinovic, Analyst of Consumer Goods]

Can you talk about the framework agreement in Denmark and if there was anything of an extraordinary character in the sales here and the same with the framework agreements in Sweden, helping the margins here in this quarter? And also, if you can balance this with framework agreements in Finland and how much of a drag these are on the margins. It would be interesting to hear these 2 together to get more of a sense for the development going forward in the LCP segment.

[Thomas Ekman, President, CEO & Acting VP of Supply Chain]

Yes, sure. Thanks, Predrag. Yes, the framework agreement in Denmark, as you know, it started off in September. And as all these kind of contracts, it's usually a fairly slow start and then you come up to a half bid in the second month, and then you're more or less up to speed in the third month. So right now, I should say it's no extraordinary in it. It's a normal development and it delivers well now. So we are more or less up to speed on that. Framework agreement in Sweden has been the same. We have different larger contracts. That has also gained traction during the quarter, so not any extraordinary in that. The Finnish site continued as before, I should say. It's -- as you know, the change was for the major frame agreement we have in Finland. There was a change where we were the only one 1.5 years ago, and now we share with 2 other competitors. But it continues, and we take -- we get our, I should say, our fair share in that.[Audio Gap]Good reason a company that we find that can deliver specific targets within a region, and we will continue to look for that. And there are many candidates and they have potential improvement. Of course, it's always the thing to find the right one. But I think with the new -- the rights issue with the money we have now, we have a good amount of hardware to continue this strategy going forward. So we have cause to view on that going forward.

[Operator]

And your next question comes from the line of Carolina Elvind.

[Carolina Elvind, Analyst]

Carolina from Danske Bank here. So I have a question on the working cap. So it's high -- quite a lot of working cap during the quarter compared to what you usually do in Q1. Do you think that you'll get stabilized going forward? Or do you think you'll stabilize at the higher level?

[Johan Karlsson, CFO & VP Finance & Business Support]

I think there is no structural change of the working capital in Q1 compared to any other -- of the last, let's say, 4 or 5 quarters. We still benefit from the longer payment terms to some of these distributors, which would mean that we would be able to be on a negative side of working capital also going forward.

[Carolina Elvind, Analyst]

Okay. And then the higher receivables, do you think that...

[Johan Karlsson, CFO & VP Finance & Business Support]

Yes. The higher receivables is basically only an effect of more business. So I think you should break it down and look at the credit terms, of the contractual credit terms. They are actually more or less exactly the same as the last year. So we have no change in credit terms, meaning that receivables will move with the sales volume.

[Operator]

And there are no further questions at this time. Please continue, sir.

[Thomas Ekman, President, CEO & Acting VP of Supply Chain]

Okay. Thank you very much then. If no further questions, then I thank you all for participating in this conference, and we look forward to meet you next time we see each other. Thank you very much for today.

[Operator]

Thank you. And that does conclude our conference for today. Thank you all for participating. You may all disconnect.

[Thomas Ekman, President, CEO & Acting VP of Supply Chain]

Thank you.