Dustin Group AB

STO:DUST

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 report '19/'20. [Operator Instructions] Also, I must advise that the call is being recorded today, Wednesday, the 8th of January 2020. And without any further delay, I would now like to hand over the call to your speaker today, Thomas Ekman. Thank you. Please go ahead.

[Thomas Ekman, President & CEO]

Very good. Thank you very much, operator. So good morning, everyone, and most welcome to our first quarter presentation and conference call. Hope you have had a relaxing and rewarding holiday break and are now back in full swing. Here on our side of the call is myself, Thomas Ekman; and we have Johan Karlsson, CFO; and Fredrik Sätterström, Head of IR, in the room as well. So today, we present our first quarter for our fiscal year '19/'20, a quarter that overall reminds of Q4 '18/'19, where we continue our transformation path to strengthen our position within services. The quarter was also characterized by some continued softness in the market, especially the PC market. Numbers from IDC shows that the PC market was down 6% to 7% in volume and 2% to 3% in value. Despite that, though, we continued our growth both through previous acquisitions as well as organically. But let us come back to that and now go through the quarter in more detail. Switching over to Slide 2. Many of you know us, of course, but just a quick run-through of who we are. Dustin is a leading IT e-retailer with a wide range of hardware, software and related services and solutions. We have a centralized warehouse and efficient logistics platform that ensure fast and reliable delivery to our customers. With the addition of a high-level IT expertise and competitive pricing, it enables us to meet the needs and demands of small and medium-sized businesses as well as large corporates in the public sector and also consumers. 95% of our business is B2B and 5% is B2C. 44% of sales comes from Sweden and 14 to -- between 14% and 20% comes from Norway, Denmark and Finland, respectively, and now 7% from the Netherlands. We have roughly 255,000 products, both 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 force. And if you look at the share on services versus hardware, we today have a share -- last year, we had a share of 16% on services and 84% on hardware. So overall, we have a strong position and we are investing and pushing ourselves forward to even further benefit from the underlying trends, such as an accelerating online market, demand for mobility, managed services, security and of course, also cloud-based solutions.So with that, moving on to Slide 3 then for some highlights during the quarter. We continue to strengthen our market position despite a challenging market. Net sales grew with 12.2% to SEK 3,508 million, where organic growth was 6.1%. The growth was fueled by positive organic growth, especially from LCP as well as completed acquisitions. Of the organic growth, SMB came in at 0.3%, just on the positive side, and LCP continued to gain share driven by public sales and grew organically 15.2% (sic) [ 15.1% ]. On B2C, we continued to put margin over growth and declined 23.4%. B2C also was affected by slower and especially later Black Friday compared to last year. And even though the market has continued to be somewhat worried in the SMB segment during the quarter with overall negative growth, in the Nordics it is good to see that we can continue to grow versus the market. LCP continues to benefit from large public deals in Denmark as well as Norway and Sweden. And B2C, I should say, is continuing according to strategy.Gross profit increased to SEK 560 million compared to last year's SEK 545 million, giving us a gross margin at 16%, slightly down from last year's 17.4%. Our adjusted EBITA came in at SEK 156 million, also slightly down from last year's SEK 162 million, and giving us an adjusted EBITA margin at 4.5% for the quarter. And the EBITA margin again grew sequentially, up from Q4's 4.0% to 4.5% for Q1 but down versus last year due to mix effects and continued, as mentioned, efforts we put in our service organization.Continuing net profit for the quarter was SEK 85.7 million, giving us an EPS at SEK 0.97. And including IFRS 16, our net debt ratio is 3 for the last 12 months, and excluding that in comparable numbers, it is 2.6. And cash flow from operating activities was SEK 225 million compared to last year's negative SEK 51 million.Other operational highlights in the quarter is, of course, our launch of our online operations in the Netherlands, which I will come back to later on in the presentation. We have also continued the ongoing consolidation of our Nordic data centers as well as our automation of our central warehouse outside Stockholm. Both of them, the data center consolidation and the automation of warehouse, is expected to be ready in Q4 2020. And of course, we have continued with the integration of our acquired entities, building on our service journey ahead.So with that, Johan, moving on to Slide 3, will you take us a bit deeper in our segments and financials?

[Johan Karlsson, CFO & EVP of Business Support]

Yes. Moving from Slide 3 then to Slide 4 and the SMB segment in some more detail. So sales in the SMB segment was SEK 1.555 billion in the quarter, an increase by 10%, of which 0.3% was organic. And as you can see, the growth is like the last 2 quarters, mainly coming from new acquisitions as the market continues to be cautious. The 10% growth in a weak market means, however, that we are gaining SMB -- in SMB gaining market shares. Segment result decreased from SEK 161 million to SEK 157 million, a decrease by 2.4%. As stated before, the investments in the transition to service sales in both brand, service delivery and service development affect margins negatively in the quarter. Segment margins at 10.1% was below the 11.4% of last year but slightly up from the 10.0% in the last 2 quarters. Share of software and services continues to increase, and for Q1, the share was 24% compared to 20% in Q1 last year.Moving on to LCP segment and Slide 5. LCP continues with strong sales growth of 18.7%, of which 15.1% was organic. Total sales amounted to SEK 1.806 billion, and public sales deals continued as before with strong development in Denmark but in Q1 also in Sweden and Norway. The large corporate customer group was, as SMB, affected by the weaker market development and had a more modest sales development in the quarter.Segment result improved from SEK 99 million last year to SEK 100 million this year, while segment margin was down from 6.5% last year to 5.5% this year. However, margins in the LCP segment improved for the third consecutive quarter from 5.0% in Q3 last year to 5.4% in Q4 and now 5.5%. Developments within the large frame agreement in Denmark is going according to plan.Moving on to B2C on Slide 6. As Thomas mentioned before, our strategy to focus on margin over volume in B2C remains. In the quarter, sales in B2C decreased by 22.8%, of which 23.4% was organic. Changed timing of Black Friday and increased price pressure in the market were the main reasons for the volume decline. In the quarter, the B2C sales represented approximately 4% of Dustin sales. Margins were strong, up from 6.0% last year to 6.2% this year, mainly as a result of lower campaign sales due to the changed timing of Black Friday and the continuous focus on margin over volume. In total, segment result was down from SEK 11.5 million last year to SEK 9.1 million this year.Continuing on Slide 7 and net working capital and leverage. So net working capital ended at negative SEK 157 million compared to negative SEK 22 million last year. If we look at the details, we see that accounts receivables increased in line with higher business volumes, while accounts payables increased both due to the higher volumes but also due to a favorable supplier mix, where more volumes were allocated to suppliers with expanded payment terms. Inventory increased by SEK 78 million mainly due to timing effects from Black Friday, but also a broader assortment within private label, the new business in the Netherlands and more customer-specific buffer stock arrangements.Net debt ended at SEK 1.872 billion compared to the SEK 1.092 billion last year. The main differences compared to last year are the impact of IFRS 16 that impacted debt on SEK 326 million and the acquisitions made during the year. Leverage ended at 2.6 in comparable numbers, where last year was 2.9. Including the changes in IFRS, the leverage number would end up at 3.0.Then moving on to Slide 8 and cash flow and investments. Cash flow for the quarter was SEK 109 million compared to SEK 563 million last year. Looking at the details, cash flow from operating activities before change in working capital was SEK 170 million compared to SEK 106 million last year. The effect from the change in IFRS was positive SEK 37 million, and paid tax was positive by SEK 49 million. Cash flow from change in working capital was positive SEK 213 million. As we saw on the last slide, the majority of this came from a strong ending of Q1 this year.Cash flow from investment activities decreased by SEK 25 million from negative SEK 53 million to negative SEK 78 million mainly due to the investments in the launch in the Netherlands and paid earn-outs during the period. Cash flow from financing activities is negative SEK 37 million compared to positive SEK 563 million, where last year was affected by the share issue of SEK 692 million and this year was affected from the change in IFRS by SEK 37 million.Moving on to investments. And total investments in the quarter was SEK 104.6 million. Investments in the IT platform amounted to SEK 12.4 million compared to SEK 9.0 million last year. The majority of this is related to the development of the platform to support the launch in the Netherlands. Other investments amounted to SEK 23 million compared to SEK 12 million last year. The majority of this was the investment of the e-commerce domain in the Netherlands, a new positioning and brand platform, hardware for data centers and equipment related to production of managed services. Earn-outs in the period was paid to Saldab and Norisk in the amount of SEK 42.5 million. And finally, SEK 26.5 million was investment in lease assets defined according to the new IFRS rules. That's the summary of the total investments and then back to Thomas.

[Thomas Ekman, President & CEO]

Very good. Thank you very much, Johan. We continue then over to Slide 9 and our short update on our online launch in the Netherlands. When we acquired Vincere Groep last year in the Netherlands, we also set out the plan to launch our online offering there. And the whole of Netherlands is a great opportunity, as we mentioned before, for us, where we, with our high IT competence, our service levels and our accurate deliveries as well as our wide assortment, have a strong value proposition towards primarily SMB. By the end of October, we launched our online operations in the Netherlands and are operating that from our logistics center in Veenendaal in the middle of the country. Right now we are running our Dutch operations in 2 tracks: the online track and the Vincere service track. We run them in parallel, and we'll over time, of course, merge the 2 to 1. And just to give some initial numbers on the development, we have so far got around 2,500 new customers, which is more than plan. Half of this comes from SMB and the other half comes from B2C at the moment, which is similar to our launch in Finland, which we somewhat compare with. But what differs and is interesting is that we have more orders with, though, a lower average order value in Netherlands versus Finland, which shows that we managed to reach smaller SMBs in a better way than we did with the previous launch in Finland. So that is a good sign. And we have roughly 180,000 visitors per month during the first 1.5 months or around the first month. And I should say we are ahead of our plan and excited about the launch and continue to work with that. Then switching over to Slide 10 to give an update on our margin journey status. Many of you listened in to our Capital Markets Day a month ago. And as you noticed then is that we are 2 years into our 5-year plan built on growth, margin and sustainable operations. Our target of 5% to 6% EBITA margin remains. If we look forward and see how we will drive our margin, the main contributors of that are, first, the customer mix, where the maturity of larger contracts will drive the LCP margin; SMB will maintain solid growth and margins; whereas on B2C, we will continue to focus on margin over growth. On efficiency, we are doing a lot. And just to mention some parts, we are, as you know, automating our warehouse to gain efficiency. We are establishing a pan-Nordic organization for supply chain and operations. Continuing on private label, we now see that we have a strong track record on our private label operations, and we see opportunities there to widen our portfolio as well as introducing the offering in our markets. We have a target and aim to reach annual sales at SEK 500 million within 3 years and reach an annual profit increase at SEK 90 million within 3 years.On acquisitions, we will continue our acquisition strategy where acquired entities have a traditionally higher margin compared to our classic business. We do this to continue to be able to be a relevant partner to our customers by adding competence and expertise within selected areas. This will drive customer satisfaction, and by that, we find growth and margin. And on managed services, next step after acquisition comes integration to enable cross-selling opportunities through our sales force and customer base. And the more we integrate, the better scale we can reach. And one example of that is, of course, our ongoing consolidation on data centers. So as we communicated also on Capital Markets Day, we'll stay with our communicated goals and work with our well-defined levers to deliver on our margin targets.And finally, before we go into Q&A, let me just summarize our Q1, a quarter characterized by strengthened position in a soft market where we continue to invest and change for increased profitability long term. Net sales rose 12.2% to SEK 3.508 billion. Group organic growth came in at 6.1%, where SMB grew organically just on the right side at 0.3%, LCP at 15.1% and B2C declined 23.4%. Gross margin was 16.0%, affected by sales mix. And adjusted EBITA landed at SEK 156 million, giving an adjusted EBITA margin at 4.5% versus last year's 5.2%. And the margin was, as mentioned previously here in the call, impacted by sales mix and the investments in our future. Sequentially, though, the EBITA margin is up 0.5 percentage points from Q4's 4.0%. And the earnings per share before dilution was SEK 0.97. So all in all, an okay quarter where we continue on our plan with a positive development in several areas and somewhat challenging market conditions. But overall, an okay quarter.And with that, we are happy to take any questions you might have. Operator, please open up.

[Operator]

[Operator Instructions] So our first question is from the line of Mikael Laséen.

[Mikael Laséen]

A couple of questions. First of all, you mentioned in the report that you see better margins for the LCP segment going forward. But can you please elaborate on that? Because that's not really visible this quarter.

[Thomas Ekman, President & CEO]

Yes. So the better margin just with -- or sorry, better margin on LCP going forward, yes?

[Mikael Laséen]

Yes, exactly. Yes.

[Thomas Ekman, President & CEO]

Yes, exactly. Yes. The -- and what we see there, of course, as we mentioned on the Capital Markets Day also is that we -- or the more mature these contracts become -- the maturity of the contracts -- on these contracts, of course, are where we see that we have the possibility to increase the margin. So -- and it is -- if you look at the per quarter, you can see that the segment margin on LCP in quarter 3, it was 5%. And then in Q4, it was 5.2%. And now we are at 5.5%. So we see that -- which you can see in the report. So we see an uptick -- the more the larger contracts mature, we see also that we can gain positive margin on that.

[Mikael Laséen]

Okay. So you expect the same type of improvement going forward in Q2, Q3? Or -- because it's typically quite seasonal with changes to volumes and so on.

[Thomas Ekman, President & CEO]

Yes. That's true. But given also the effect -- as you know, we have a large contract in Denmark, and that, of course, affects this in a certain way given the volume of that or the size of that contract. But we see also that all LCP contracts that we have that are large in this sense have the -- there we see that we have the possibility and also can show it in the numbers that we are -- have the possibility to increase the margin. So we will continue to work hard in order to continue that path, even though, as you say, there are seasonalities, but we see a possibility to increase the margin the more they mature.

[Mikael Laséen]

Okay. Got it. So the Danish contract, the -- how did that -- did that sort of develop fully in line with the normal or typical development of a large contract like that but after a year or 2, the margins tend to increase? So did you see that also this quarter?

[Johan Karlsson, CFO & EVP of Business Support]

Yes. Absolutely. And I think it follows -- even though the Danish contract is obviously, because of its size, on a low margin level, it has the same development as any other, say, public frame agreement. But it improves during the life cycle of a 3- to 4-year contract.

[Mikael Laséen]

Okay. Good. And another question is regarding the market situation. It seems to be a bit soft in the corporate side. Can you discuss this, what you see out there? And maybe some comments on the outlook for SMB and the large corporates, please.

[Thomas Ekman, President & CEO]

Yes. Sure. I mean, what we see -- as you saw in the report, we also mentioned there the IDC numbers, that the PC market is going down 6% to 7% according to them and the value decreases around 2% to 3%. It's as we saw also in Q4 and what we mentioned there. I mean, the first one to see a softness in the market are SMBs. And then later on, the larger corporates came along, of course. But -- so then also, the SMBs are the first one to come back. And also, what we said then during last quarter was that this usually continues for 2 quarters, 2 to 3 quarters. So if you look historically on it, it should be around 2, 3 quarters or 2 quarters ahead that we can see a sort of an uptick on the market again. And therefore, of course, given the fact that the market is in -- has been somewhat challenging, I think it's good that we still can continue to outperform the market in growth, especially on the PC market, which is an important part of our market, of course. So we'll see. But we'll continue. But overall, it has been slightly challenging, but we have a clear plan for managing that and are working on that.

[Mikael Laséen]

Okay. Just a clarification. Did you have any negative impact from the Intel situation? Seems to be a lack of processors also this year.

[Thomas Ekman, President & CEO]

Yes. I mean, we -- of course, we are affected on that, that we are, and it delays the deliveries. And then some of our customers are specific when they buy computers, and they want Intel [indiscernible] and Intel processors. And of course, we work hard to shift over to AMD, which is the second provider of processors in the world. And that works quite well. But all in all, you can say that, that has actually affected both in the Netherlands and in the Nordic market, the shortage of Intel processors. But we look forward to -- we work close to see how that can develop going forward. But some effects, of course, it does have. And it's similar, as we saw last year actually.

[Johan Karlsson, CFO & EVP of Business Support]

Chinese has the highest impact on, let's say, larger corporates, I would say. It has some impact on SMBs but even more on the corporate part of LCP.

[Operator]

Our next question is from the line of Erik Elander.

[Erik Elander, Research Analyst]

So I have a couple of questions here. So first of all, you would now, from Q2 and onwards, make easier comparables for -- in terms of both organic growth and in margins for SMB. And previously, you had talked about SMB taking about 1 year at turnaround in terms of demand. How do you view the markets right now in the SMB segment? And what should we expect in terms of growth and margins in SMB in the coming quarters now given what you see in the markets?

[Thomas Ekman, President & CEO]

I think it's -- we should -- as always, it's always difficult to predict, but what we see is, of course, that we can see -- compared to our last year's performance, we see that we have the possibility to gain. I mean, we've become better and better at getting earnings from services. We become better and better in our position towards our customers. So all in all, we are on a plan to improve. So I think that will, of course, benefit us going forward. How the market develops is, as I mentioned previously here, we believe it is around -- when a softness comes in market, it's around 2 to 3 quarters that you have that softness with you. So we will see how it develops. And of course, that also reflects somewhat of the Intel, but overall, the uncertainty in the market right now. We still believe that -- or what we can see in the signs is that it, of course, will continue in another maybe 2 or 2 to 3 quarters.

[Erik Elander, Research Analyst]

Okay. Excellent. And then also regarding the cash flow. So you mentioned that the positive cash flow effect you had year-on-year here was related to more favorable procurement from suppliers with better payment terms, in other words. Is this something we should expect also going forward, that working capital would actually structurally come down because you buy more of your stuff from suppliers with more favorable payment terms for you?

[Johan Karlsson, CFO & EVP of Business Support]

I think it will -- as it has in the last 8 quarters, it will vary between the quarters because it really is an effect of the assortment that the different suppliers carry at a given quarter. So in certain quarters, that's bigger effect than others, and hence the, let's say, working capital effect is greater in these quarters. The total, I think, difference of that would be in the range of SEK 100 million. So you would be SEK 100 million up or down on working capital coming from that. And that you can see -- if you would compare the last 8 to 10 quarters, that would be the differences that we will have on the working capital between the quarters.

[Erik Elander, Research Analyst]

Okay. Perfect. And then a final one for me. So actually, you talked about the softness in the SMB market. The duration of the softness is around 2 to 3 quarters. Is there any type of estimate that you have for the corporate market, i.e. how long does it take for the corporate market to improve while it has been weakened for a while?

[Thomas Ekman, President & CEO]

I mean overall, the softness we have seen has, of course, as we have mentioned in Q4, it has been going on for 1.5 to 2 quarters. So of course, we see that, as we mentioned in Q4 and also now, is that this will prolong for maybe another 1 quarter given the fact that it is a duration of 2 to 3 quarters. So we'll -- yes, right.

[Erik Elander, Research Analyst]

Within the LCP segment, sorry for not mentioning that. Within the LCP segment, not SMB.

[Johan Karlsson, CFO & EVP of Business Support]

Okay. Sorry, sorry. I think, again, without making a prediction, looking at history, you would say that the corporate side would be slightly delayed compared to SMB. So if we've seen a 1.5-, 2-quarter slowdown in SMB, expecting that to continue maybe another quarter, then you would probably have a little bit of a delayed effect on the corporate side. But that would be from an historic perspective. Obviously, in our case, the public sector is such an important part of the LCP, so that has so far covered well for any, let's say, softness in the corporate market.

[Thomas Ekman, President & CEO]

Exactly.

[Operator]

There are no further questions at the moment, sir. Please continue.

[Thomas Ekman, President & CEO]

Okay. Thank you very much. And then with that, we wish you a continued happy day and rest of the week. And see you soon. Thank you very much.

[Operator]

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