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Dustin Group AB
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Ladies and gentlemen, thank you for standing by, and welcome to Q2 report conference call. [Operator Instructions] I must advise you, this conference is being recorded today, Wednesday, 11th of April, 2017. And I would now like to hand the conference over to your speaker today, Mr. Thomas Ekman. Thank you. Please go ahead.
Very good. Thank you very much. And good morning, everyone, and most welcome to our second quarter presentation and conference call. I hope you all have had a good morning. 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. We will go through the presentation that you probably have in front of you, but it's available on dustingroup.com. So we start off -- go through in the slides. Going then 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 Nordic IT e-retailer with a wide range of hardware, software and related services and solutions. We have a centralized warehouse and a efficient logistics platform that we can ensure a fast and reliable delivery to our customers. And we also have, in addition to that, high-level IT expertise and competitive pricing that enable us to meet the needs and be relevant to our primarily small- and medium-sized businesses, but also, of course, to large corporates, and public sector as well as consumers. 94% of our business is B2B and 6% is B2C. Half of our sales roughly comes from Sweden; and 15% to 17% comes from Norway, Denmark and Finland, respectively. We have roughly 250,000 products of both hardware and software in our assortment, where 75% of those are sold online, and the remaining 25% are sold through our strong relationship sales forces. So overall, we are a company positioned well in a growing market. And of course, we are benefiting from the underlying trends, such as an accelerating online market, a strong growth in mobility, security and other services like cloud-based solutions, for example. Very short on Dustin there. But then moving on to Q2 and Slide #3 for some highlights during the quarter. Earnings for the second quarter were strong in terms of sales and margins. We had a robust sales growth in the SMB segment, while we were negatively impacted by lower volumes in the LCP segment. A more advantageous product mix with a larger share of advanced products and services was one of the reasons behind much of the margin increase. Furthermore, a more favorable balance in sales between SMB and LCP segments, combined with the higher share of sales of our private label products had -- also had a positive impact on the margin.If we look at the numbers, net sales increased with 8.8% to SEK 2,723 million, with an organic growth at 1.7%, where SMB was 10.9%, LCP was minus 5% and consumer sales were up to 10.8%. Our gross profit for the group came in at SEK 420 million, with a gross margin at 15.4%. And that then, in turn, filtered down to an adjusted EBITA margin at 5.3%, going up from the last year's 5.0%. And furthermore, earnings per share increased to SEK 1.21, and the cash flow from our operating activities came in at SEK 15 million. And the net debt was SEK 1,186,000,000, which is equal to a net debt ratio at 2.5. So Johan, can I ask you to take us a bit deeper in our segments and our financials?
Yes. Thank you, Thomas. Let's move to the next slide and go through the segments in somewhat more detail. We're starting with SMB. As Thomas mentioned, we had a really strong quarter in SMB where sales grew by 22%, of which half of that, as said before, 10.9% was organic; and the other half mainly came from acquisitions. During the quarter, we've seen strong performance in our online business where clients, that is computers, tablets and mobile phones, developed strong, together with the infrastructure category. Also, the recent acquisitions have performed well in the quarter, adding to a strong product mix, with more services and solutions sales in combination with more sales of advanced hardware. As Thomas mentioned before, during the quarter, we've also seen continued growth of private label sales continuing to the margin improvement in the quarter. We've also seen development in our Software-as-a-Service sales, where we have increased from 16,000 seats last year in Q2 to 38,000 seats this year or an increase by approximately 130%. All in all, this resulted in a segment -- in a segment result of SEK 136 million compared to SEK 97 million of last year, an increase by almost 40%. And the segment margin improved from 10.7% last year to 12.2% this year. All in all, a very strong performance of the SMB segment during the quarter. Moving on to Slide 5 and large corporate and public segment. Net sales for the large corporate and public increased by 0.2% in the quarter to SEK 1,444,000,000. Organic growth was negative by 5%. The competitive environment has been strong in both Finland and Denmark, where many of the largest deals and rollouts in the market have been won by negative margins. Dustin had not participated in some of these bidding processes due to the low margins. This has affected volumes negatively in the quarter. However, in Norway, business volume have been good, and new agreements and rollouts has been won. During the quarter, we've also seen positive sales development to corporates in all the markets. Segment result decreased from SEK 106 million of last year to SEK 93 million of this year, mainly as a result of the lower volumes and margins in the basic hardware business. Segment margin of 6.5% was 0.9% lower than last year. Moving on to B2C and Slide 6. B2C had a strong quarter and grew by 10.6% or 10.8% organic. We saw strong development in Denmark and Finland. And from a product perspective, the basic hardware and, in particular, consumer electronics and client accessories, performed well. Segment result improved SEK 2.5 million or 42% to SEK 8.4 million, and margin was up from 3.9% to 5%. As you remember, we mainly have the consumer segment to understand market trends and to get access to consumer assortment, and we keep a strict strategic focus on margins.Moving to Slide 7 and net working capital. Net working capital at negative SEK 97 million was SEK 70 million better than last year. If we look at the details, accounts payables are still positively affected by better payment terms from some distributors, and we see currently no sign of this ending. But as said before, we have these contract terms on a quarterly basis. Accounts receivables moved in line with sales, so no change in operations. Inventory levels were up from SEK 301 million to SEK 313 million, mainly as a result of higher inventory for some of the private label products and more inventory held for specific customer rollouts. Net debt at the end of the quarter was SEK 1,186,000,000 compared to the SEK 812 million of last year, resulting in a net debt relation to EBITDA of 2.5. This was up from 2.3 at the end of last fiscal year, but right in the middle of our target range of 2 to 3. Moving to Slide 8 where we have a look at the cash flow and the CapEx. So cash flow in the quarter improved from last year, negative SEK 247 million to SEK 16 million. If we look at the details, we can see cash flow from operating activities, before change in net working capital, improving slightly, positively affected by the higher result but somewhat negatively affected by higher tax payments. Cash flow from change in net working capital improved SEK 66 million over last year, mainly as a result of positive change in accounts payables. When it comes to investment activities, the final payment of the Core acquisition done in Q1 affected this quarter. And as mentioned before, the -- of course, CapEx down during the quarter. Cash flow from financing activities was affected by the dividend of [ SEK 213 million ] compared to SEK 183 million of last year and by the increase of loans as a consequence of the Q1 acquisitions. We then look at CapEx in some more detail. Total CapEx was SEK 13.3 million, of which SEK 6 million was investment in the IT platform and SEK 4.1 million was other tangible and intangible asset investments. Financial lease in the report is mainly coming from the newly acquired companies and relates mainly to company cars. Moving to Slide 9 and back to Thomas.
Very good. Thank you very much, Johan. And over to Slide 9. This is to give you a view on what we have explained before and why we also decided to split our reporting in SMB and LCP segments in order to increase the transparency and understanding of our business. And as you can see, we have an -- extensive quarterly fluctuations in our public sector contracts within LCP, and that we want to show here. In LCP, we have high volumes coming from the public sector. And depending on when contracts and new tenders come out to the public sector -- in the public sector, LCP is fluctuating somewhat. Number of available and relevant tenders varies over time and between quarters. And we are, of course, very closely monitoring the balance between margin and volume. And as you can see on the graph on the slide, this varies over time, where you can see that we have been both negative and very positive in an historical perspective. To mitigate this, of course, we are increasing our efforts towards the corporate sector where there are more players, [ to treat ] as well, and they compensate this on other levels as well, increasing [ our percent ] in SMB to have a more balanced journey going forward. So over then to Slide #10. As we've seen this quarter, we have increased our EBITA margin to 5.3% from last year's 5.0%. We believe we have well-defined levers that will contribute to our margin journey where the customer mix will work in our favor, even though we dropped somewhat in SMB this quarter. Private label is going according to plan, and we are already now halfway to our 3-year target. Our acquisitions contributes well this quarter, the completed ones with the 6.6% of the growth. And on managed services, as Johan also mentioned, we have increased our base in seats from 16,000 to nearly 38,000. So we'll continue to work hard on all these areas in order to deliver on the targets we have for the margin. But we believe, as said, we have well-defined levers to deliver on the margin journey.If we move on then to Slide 11. This -- in fact Slide 11, we showed you this slide last quarter as well, but I want to take the opportunity here to reiterate our focus going forward, where we aim for a growth of approximately 10% over a cycle, and that's in order to take us to become a one-stop shop for SMBs in all the Nordic countries. We aim to give our customers a fully integrated online experience for products and service sales. And we believe that we can reach a plus SEK 4 billion in sales of advanced products and services, driven by both acquired companies and, of course, our underlying -- or our organic growth. And furthermore, this -- we believe that this will lead to a plus SEK 1 billion in recurring revenues. So this is just to show you that we continue on this and we work towards these goals. Going to Slide 12 to summarize the Q2 report. We have had a good margin improvement and a robust performance in SMB, where net sales increased with 8.8%, with a somewhat two-tiered sales trend in SMB and LCP. Gross margin at 15.4%, and the adjusted EBITA margin at 5.3%, giving us an earnings per share at SEK 1.21.So all in all, a good quarter. And our positive view of our future remains firm. And the combination of a more favorable balance in sales between SMB and LCP segments and, as said, a more advantageous product mix for us with a larger share of advanced products and services have also given us and resulted in a good strengthening of our margins. As Johan mentioned also, we have a solid financial position, and we are well-positioned to -- for continued profitable expansion, both organically and through acquisitions. And as we see ourselves as the leading IT reseller to the B2B market in the Nordic region, we can further consolidate our position through the continued development of our product and service offering, together with our proactive sustainable efforts. So with this, we conclude our presentation. And we're, of course, very happy to take any questions you might have. Thank you very much. Over to you, operator.
[Operator Instructions] And our first question comes from the line of Magnus Råman.
Magnus Råman, Handelsbanken, here. Maybe I can start here with acquisitions. You made a lot of acquisitions in 2017. I believe it was 4 to 5 acquisitions, and the last one was in November. Can you update us on your view for this year? Do you expect to do as many acquisitions, perhaps not, but what does the pipeline look like?
I think we have a -- as you know, we have set the target of doing 3 to 5 acquisitions per year. And we, of course, always look forward to continue to find good targets where we can find new competence, especially in the advanced services and products. So we will continue to look forward to that, and we continue with our objective to find around 3 to 5 per year. So there's no change in that, just a matter of finding the right targets.
Right. Then perhaps on private labels. If I got you right, you are now on, like, 12 months' rolling sales or something like that. You are above SEK 200 million in private label sales. Did I get that right?
We are -- no, not really. We are not that up there -- we are more or less halfway through our 3-year target.
But more -- Magnus, it's more on the margin side. Actually, we are -- it depends a little bit on the product mix when it comes to how much sales and how much margin we develop. So we are close to halfway when it comes to margin contribution, but we are a little bit further away from sales. So we have actually better margin -- margins coming from private label than expected.
Okay, so that's quite positive then. That's even more positive, I'd guess.
Yes.
Yes, it is.
But can you help us understand how does this split between business-to-consumer and business-to-business? Is a lot of these sales in the business-to-consumer side?
On private label? No, it's primarily on B2B, on SMBs. And there, we are -- as you know, we have started off in quite low complex products like cables and adapters and stuff, and they are growing very well. And now we have moved up a little bit to screens and also other accessories. But for us, private label is a good thing for us. We can see -- we have a good control of manufacturing and the products, but it is for us a margin. It's a contribution for margin rather than volume. So -- and we can see now that we can develop a good margin journey on private label, so that will likely continue.
So essentially, if you are to reach your SEK 400 million sales target, with the margin contribution that you have witnessed now, it will be a larger positive margin contribution than what you expected when you outlined this initiative?
Yes. Of course, it depends. But we focus on the margin, you can say that, you can say.
I think it comes also from the fact that if you start by the less advanced product where we actually can get the better margin contribution, when we add on some of the other categories where maybe margin contribution will be less in terms of percentages, then it will even out. So we still believe that it will be around the SEK 440 million that we talked about before when we come to SEK 400 million.
Okay, yes, that's clear. Then on SMB, specifically, do you believe that you can maintain an organic growth rate of -- at double digits that we saw in this quarter going forward?
We will continue to work for that, at least. Of course, this depends somewhat on the market. But we have a strong position, we have a loyal customer base that we continue to work hard to stay loyal and stay relevant to. So of course -- but it's a daily work to do that, but staying on and have a good pricing and a wide assortment and also the possibility to give our customers support in what they are buying and what they could be buying on top of the things they have bought already. We will continue to work hard on that, of course. But as you know, our target is an overall organic growth -- or a growth of 10% over a cycle. It kind of varies from quarter-to-quarter, but we have a good position in the SMB market that we will continue to work with.
Right. And on Software-as-a-Service where you presented some numbers here, what is the potential here [ for you now ] in terms of user base? And what does that imply, in terms of growth potentials going forward? I mean, the user base has grown very strongly, then up to date, how do you see that play out going forward?
I think we have the -- as I said, I think from -- going from -- or starting at -- as from where we start from where we sell a product, we have a lot of room to grow within our existing customer base. And of course, that's the next step for a customer, when you have bought your hardware is to go to, for example, Office 365, and to put things on the cloud. And there, we can have very relevant offers. And we are sort of already inside our customers and are able to work with them to -- in order to get them there. So the potential is good. But then the speed of that, of course, can vary over time, but we believe we have a good potential to grow there. And we are on the starting point of this journey, I should say.
Right. A final one from me, perhaps to Johan there. Amortizations were lower in this quarter than previously. Do you think we will see this continue in the coming quarters?
Yes. And it comes from the fact that we are now running out of amortization from 2 of the big acquisitions that we did in -- to establish Norway and Finland, where we actually have quite a lot of intangible assets, which we have been writing off for the period up until now. So it will go down slightly in Q3 as well, but then it will stabilize, basically.
And our next question comes from the line of Daniel Thorsson.
Daniel from ABG. So first question, on the LCP segment in Denmark and Finland, have you seen increased competition or just better pricing power from the public sector, putting pressure on profitability in the recent tenders?
We have seen both, actually. In Finland, there has been aggressive pricing from some players and in Denmark as well. And this is, of course, a constant balance, as you know. This happens from time to time and we have experienced it before. And sometimes, we have been aggressive as well. But right now, I think there has been somewhat a change in the public sector regarding the contracts, so they are more defined. And now we have had some aggressive pricing on the market, so therefore, we have chosen not to participate in some of the biddings. But this, of course -- we follow this very closely, and the balance.
I think, historically, we've seen this before. We saw it basically at the time of the IPO. We have also had a tough time on large corporate and public also coming from the fact that some of the competitors was trying to buy market shares. This -- since we have such a competitive cost structure, we believe that these are temporary activities by competition, but they cannot continue with this forever. So it will come back. The question is a little bit the timing of the -- how sustainable they are on driving this competition for a couple of quarters, and that's really hard to predict from our side.
Exactly. The second question was around the timing. Do you think this is sustainable? Or do you think it will come back during this fiscal year? Or how do you see the development for LCP?
I think it's not sustainable what we see in -- particularly Finland and Denmark at the moment. And obviously, it's hard to predict how long that can continue. But what we can do is that we can, of course, act on other markets and in other customer situations, where if we do that, we can compensate a little bit for that situation that we have in Q2. So our ambition is, of course, to improve the LCP sales development in Q3. But we don't believe that the competitive situation will all of a sudden go away. No.
Okay, that's perfect, that's perfect. And this is not the result of lower volumes in the market then, I guess? So I guess, the volumes and the demand are still there from the public sector in Finland and Denmark.
Yes.
Yes, it is, it is.
Okay. Given the strong organic growth in SMB, especially from some devices you mentioned in the call, is that a result of any new specific product launches from larger suppliers, or that could have affected just this quarter positively?
No. Actually, no, there has not been that many new launches in that sense. It's just the normal products out there, and -- but demand for those devices and products are high.
Can you say something about specific products? Is it laptops? Is it smartphones? What is it out there?
Laptops is a good driver in this, smartphones as well, but laptops has been good. And then it's also, of course, companies buy more products, peripherals around the computers, the laptops. You buy a lot of chargers and stuff around, which is good for us. But laptops is still a driver of this. There, we work closely with our vendors also.
Okay. Yes, that's it from me now. I had the same question around the amortizations as well, but you answered that very clearly.
And we have 3 more questions. Our next question comes from the line of Victor Höglund.
I had a question here -- several follow-ups, most have been taken here. But just wondering, really, the trends that you see out of the quarter and maybe now in the beginning of the quarter, do they vary in any way to what you now reported for Q2? Is the SMB trending stronger or better out of the quarter? Or is it about the same level throughout the quarter? And the same question really on LCP.
I should say the market is the same, as we can see at the moment, and so that is good for SMB. The LCP market, as we said before, it's -- has been somewhat -- the volumes are there, but the pricing has been lower. But the -- as it looks right now, the market is roughly the same as we can see now.
Okay. And I was just wondering, on the M&A, also a follow-up on that, are you looking actively at things now? Or is it more that you want to do acquisitions and hoped that they come up? Are you in any processes at the moment? That's the question.
We are always active on this given our target, as you know. Given our target of 3 to 5 acquisitions per year, we are, of course, always active in this area to find companies that can complement our current portfolio. So -- and they are constantly active on this area.
Okay. And last question here. Are there any -- so the comps clearly was tough now in Q2 for LCP. Are there any similar effects which you have in mind when looking at Q3 and Q4? LCP has tough comps for the rest of the year, but I mean for -- is there anything we might forget here or should keep in mind?
No. No, no, actually, no.
I think, Victor, that we will have -- we have pretty tough comps, Q2 to Q4, when it comes to primarily LCP, I will say. But of course, we can -- we are starting, and we are acting to mitigate some of these public tender price competition issues that we have. So our intention is, of course, not to stay at negative 5% throughout the year, but it will be a tough rest of the year for LCP, for sure.
And our next question comes from the line of Predrag Savinovic.
A few follow-ups from my side as well. Is it safe to assume that the margin trend in LCP will get better since you did sign a lot of public contracts in the last year, which should mature in this year? And also maybe if you could elaborate a bit on -- I mean, the LCP sales were in line this quarter as with last year, but then margin is -- or the [ EBITDA ] is down 12%, and maybe just read a little bit about this?
I think you're right on the roll-on of the larger contracts that we won last year. They are improving in margin. What's working against that is, of course, that the new contracts that we win, even if we are not bidding on everything, we are still bidding on some of the contract in these markets, they are at lower margin than we usually expect to see, so it's kind of compensating a little bit. And therefore, I think we can see, going forward, margins improving coming from the old contracts where we roll on, and then comes back to again the question of how long and how hard will the competition be on margin when it comes to the new contract in primarily Denmark and Finland. But for us, it's really hard to predict that, given that Finland is quite a large public market for us. It has impact on the totality from there.
Okay. But could you give us maybe some kind of indication as to, let's say, the run rate of the old contracts, some kind of quantification, so you know -- and maybe how -- the new contracts you sign today, how much lower are there -- is the pricing point there?
Well, I would say that the current situation is that we would bid on contracts down to almost 3%, 4% of margin compared to the fact -- or maybe 2% of margin where we usually would go to 5%. So it's where we are at the moment, we look at 2%, 3% lower margins than usual. But then we don't bid on everything, because some of the deals are just below that, and then we don't go for it.
Okay. And a few follow-ups also on the M&A side. Could you add maybe any other kind of service as a software to your offering to get you less reliant on Office 365? And what would that be in that case since the majority of your sales come from SaaS -- comes from the 365 at the moment?
Yes. I mean, we are constantly adding vendors to our Software-as-a-Service footprint, for sure. So -- and that the fact of the matter is only that our customer base is coming from a very much Microsoft-oriented environment, so it's natural for them to start with the Office 365, let's say, move. So this is positive for us because our customer base is already using Microsoft to a large extent and, therefore, the move to Office 365 is quite easy to make. And we have a large potential there where we have just started. As Thomas has hinted before, I mean, at least 38,000 seats, that's just the beginning of something that can be going on for a couple of years.
All right. And a follow-up also on the new launches of products as another analyst hinted before. Hasn't there been a new Windows Enterprise being rolled out currently is what we'll be hearing? Could that be one of the drivers behind higher growth in SMB as well? Or if I'm missing certain...
No, that has not been a particular driver in this. Of course, I mean, always, when there come new product launches, that can have some impact on the trends. But this quarter, we haven't really seen that, that has had any specific impact. It's rather that the sales have been good, and the SMBs are continuing to shift towards modernizing their equipment and modernizing their laptops, which, of course, is in favor for us; so not particularly.
And our next question comes from the line of Mikael Laséen.
My first question is also related to the LCP side. Just a simple question. Can you just remind us roughly how much you have from public versus large corps?
Yes, we have roughly 2/3 from public and 1/3 from corporate.
Okay. And the growth rate for large corps, is that 5%, 6%? Or is it also flattish? Or...
It's clearly positive.
Okay. But not in line with the 8% group target, I guess?
I would say it's close to that, but a little bit below.
All right. Okay. And the SMB margin was really good. And can you just remind us also here about the seasonality? It's usually lower in Q3 and Q4. Any reason why this shouldn't happen also this year?
I would say from the Q4, it's no reason why it shouldn't happen because that really comes from slightly lower volumes during summer. So let's say, the general OpEx will be affecting the margins harder in Q4. So that's the normal situation. Q3 is more depending on actually activities during the quarter. And there, it should not be a seasonal effect, as such.
Yes, okay. How much effect did IT-Hantverkarna have on this margin in Q1 -- Q2, sorry?
I mean, it was in the end quite a small part of the business that we're doing, so it didn't have a large impact on the total margin, I would say. I mean, they were in line with the margins that we have on the newly acquired companies. So we have basically exchanged them for some other companies, as such, but no major difference on the margin.
I thought they had 0 margins, roughly, the part that they didn't divest in?
Yes. Sorry, on segment margin, they were positive, let's say, when we took them away on margin. It became better for us to take them away, that's why we sold them. I was actually thinking on gross margins here. But yes, you are right, it affected slightly positive on the margins coming from IT-Hantverkarna, but again, very little turnover coming from there.
Yes, okay. And net working capital increased now quarter-on-quarter. And I mean, given what you see today, if it's fair to assume that this will continue the trend, the seasonality, if you will, that we saw last year, that it was a very positive development in Q1 and then gradually a deterioration from there? Or was that sort of just natural of -- I mean, that it was maybe kind of yearly specific or specific to that year?
I think it was slightly exaggerated during last year, but the trend is more or less the same, that working capital is very good during autumn. When seasonality or a seasonality is strong, then our working capital is good because we are buying a lot of goods to stock. And then it goes down in Q4 where sales are very low and we are emptying stock. And therefore, in end of Q4, it's usually slightly weaker. The other 2 quarters should be more or less neutral, let's say.
We still have a follow-up question from the line of Daniel Thorsson.
Yes, just a short one. On the private label products, do you see -- what type of products do you see the highest growth and demand for at the moment? And is that replacing old products that you were selling for other suppliers? Or does it add incremental sales to an unchanged product portfolio?
I mean, as I said before, Daniel, we -- primarily, we have focused on the lower end -- or low-complex products like cables and stuff. We have also entered into new parts there with screens and toners and stuff. But we see that the sales increased. And of course, it substitutes some of the sales from other vendors. But when it comes to these kind of products, it's not sort of a brand -- the brand perception is not that high for cable, for example, so we see that we can continue to develop that quite well. But it's...
Okay. So you're basically replacing a product that was sold with the branded name, but you get a slightly higher margin but probably lower price for that one? So it will affect growth, all else equal, slightly negative, but bottom line positive because you were selling those products before?
Yes, we did. And some, of course, we have new -- some new categories have been added, but that is the margin thing for us.
And we have one last question, that's from the line of Victor Höglund.
Yes, just sorry - I need to understand here. Can you just -- in Q2 now, M&A boosted SMB by some 10%, 11%, something like that. How does that normalize throughout the year, the M&A boost, let's say. When -- yes, the companies you bought, when will those numbers be year-over-year organic?
Victor, it's Johan. I think the Saldab acquisition will then neutralize somewhere during spring. As you remember, we did that during spring. And the others came all in Q1, so they will continue to be, let's say, acquired growth for the rest of this year.
Thank you. There are no further questions at this time. Please continue.
Okay, very good. Thank you very much for participating in the call. And as said, we have had a good quarter with continued margin improvement and a robust performance in SMB. But that concludes the call for us, so thank you very much for participating, and have a continued good day. Thanks very much.
Thank you. That does conclude our conference for today. Thank you all for participating. You may all disconnect.