Dustin Group AB

STO:DUST

Earnings Call Transcript 2023-Q2

[Thomas Ekman, executive]

Great. Thank you very much, and sorry for the slight delay here with the connections, but here we are.

So good morning, everyone, and most welcome to our second quarter presentation and conference call. Hope you're all well. Here on our side of the call, this is myself Thomas Ekman, and we have Johan Karlsson, CFO, but also soon to be CEO and our Head of IR, Fredrik Satterstrom here in the room as well.

So we present our second quarter results for our fiscal year '22, '23. In our Q2, as you know, from December to February, was on a macro level, very similar to Q1 and continue to be characterized by a cautious trend among small and midsized companies in the SMB segment, while demand remained favorable within the public sector and large companies.

An improved product mix within LCP in combination with the expiry of the agreement with SKI 50.40 in Denmark, supported also a good margin improvement sequentially from Q1 and also the reduced tied-up capital and inventory enabled and improved net working capital and lower net debt during the quarter. And I must say it is encouraging to be -- continue to be able to present the progress for the quarter that is in line with the scenario presented during the Capital Markets update in February.

We continued the year with a total growth of 2.2% and despite an anticipated and clearly cautious development in SMB. Access to standard hardware was good and has fueled a certain degree of price pressure in the market. And as we have said before, we see the same patterns as in previous economic crisis that SMBs are the first ones to react, corporates are a bit slower and the public sector continued to spend. And typically, these periods have lasted around 2 to 4 quarters, and now we have passed the second one. And although we have a negative growth in SMB, we can see a stabilizing market, especially in the later part of the quarter.

We are also further progressing well in our integration in Benelux. And as you saw this morning, we are now taking the next steps in efficiency and customer attention by merging our 2 large corporate and public organizations to one. And they will be headed by Michael Haagen, who previously was responsible for a Nordic LCP organization. And he has a great knowledge in combining countries and merging and building together 1 organization. So this is a very good move and also will, of course, create more synergies for us. And that's, of course, lower cost over time as well as an improved customer offering.

Well, let's go into our Q2 presentation and the -- or for some more details. As you know, we have our -- for your reference, we have on Slide 2, Dustin at a glance, but I think we can move directly to Slide 3 for some financial highlights.

That said, the second quarter continued to be dominated by general economic uncertainty and a cautious trend among some of our customer groups. The availability of hardware was good and continued demand among large customers lay the foundation for favorable growth despite a cautious attitude among the small and medium-sized companies.

Net sales up 2.2% to SEK 6.2 billion. Organic growth was negative 2.4%, of which minus 10% was for SMB and plus 1.1% for LCP. After a weak start in December, demand has stabilized within the SMB segment, but also remained obviously cautious, but especially mainly on the small-sized companies, but large companies in the segments together with the consumer sales displayed a positive growth during the quarter as a whole.

Development in LCP was generally strong, both among large companies and to the public sector, but was impacted negatively this quarter by the expiry of the Danish framework agreement with SKI now during the first quarter. But at a high level of activity and also strong impacts of new customers in all -- or in several of our markets, in all markets have also offset this to a certain extent. And that has also been despite our more generally or more selective and margin-focused attitude towards new customers and agreements from our side.

Gross profit came in at SEK 914 million, up from last year's SEK 904 million. The gross margin amounted to 14.6% for the quarter, which is a good improvement or a distinct improvement from compared to the 13.4% in the first quarter, so sequentially very good. The improvement is mainly attributable to developments in the LCP segment where the product mix have started to improve and improved over the quarter with a larger share of more advanced hardware and combined also with the phaseout of the major Danish agreement, as I said, we did low margin.

Gross margin within SMB weakened during the quarter as a direct result of higher proportion of campaign goods and shift to more basic alternatives in the product offering. Adjusted EBITA amounted to SEK 212 million and the adjusted EBITA margin was 3.4%, which clearly indicates an improvement compared to 3.0% in the first quarter, which is, of course, encouraging to see. EBIT amounted to SEK 157 million and including items affecting comparability of minus SEK 9 million, and those are primarily related to the integration of Vincere and Centralpoint.

Earnings per share was SEK 0.72 compared to last year's SEK 1.27. Cash flow from operating activities amounted to SEK 250 million during the quarter and improved sequentially compared with the negative SEK 85 million in the first quarter. And net debt decreased with SEK 152 million to SEK 4.6 billion at the end of the quarter compared to SEK 4.759 billion in the first quarter.

And as a result of slightly lower profit, net debt in relation to adjusted EBITDA was 4.4% compared to 4.3% in the end of Q1. The current leverage level, however, is assessed as being temporary, and we see that it will -- we expect it to fall in the next few coming quarters.

Other operational highlights this quarter is, of course, that the inventory declined to SEK 1.2 billion compared to SEK 1.6 billion in the first quarter, and this is mainly as a result of reduced customer-specific inventory. And I must say, I'm really proud and of course, encourage what we have achieved here. And this strong improvement means that we are ahead of our target -- our own target of an inventory value of SEK 1.1 billion at the end of August, i.e., this -- end of this financial year. And it also shows that there is the imbalances that has been during the fall has started to become more balanced in the supply chains, which is, of course, very good.

Then as you have seen, we updated our financial targets and segment reporting in our Capital Markets update that we held on February 21, and we will come back to that later on in the presentation. And we are on track with the integration in Benelux and continue with the synergy extraction, the identified SEK 220 million with where we see clear effects will come in the second half of this year. And also, as an example, merging our 2 LCP regions to 1 as next step in the integration.

And then, of course, the great news that Johan Karlsson has been appointed as a CEO, very good. Good. Johan, you can -- by that also continue to take through the segment.

[Johan Karlsson, executive]

Yes, let's move to next slide, Slide 4 and the SMB segment in some more detail. As this is the first quarter with the new segment definition, including B2C, you will see some new numbers and levels in the segment reporting. Sales for the quarter ended at SEK 1.822 billion, representing a negative organic growth of 10%. In the quarter, we saw that the economic uncertainty is continuing to affect our small- and medium-sized B2B customers.

However, sales to the larger SMB customers and consumers was slightly stronger than last quarter. From a geographic perspective, sales were strongest in Denmark and Norway. In all markets, the promotion activity is high as everyone is trying to increase sales at the same time as demand is low. As we continue to -- and this affects margin somewhat negative. As we continue to realign the service portfolio, the share of software and service was down from 14.6% last year to 11.3% in Q2 this year. The main reason being a lower software share but also the move away from time and material consulting and outsourcing in the service area. And by that moving towards the standardized managed services.

This is now possible as the integration in the Benelux is continuing and the data centers are being consolidated and common European assortment is introduced. The segment margin reduced from last year 6.7% to 4.4%. Lower volume due to weak demand put pressure on margins as cost base is too high for the actual volumes affected by high inflation.

Added to that, the high share of promotional sales is weakening the markets. Balancing the weakening -- the weaker margins is a strong sales of contracted recurring services with margins above average and also private label is continuing to deliver strong sales and margins contributing positively to the margins and profits. Segment results ended at SEK 80 million compared to last year's SEK 135 million.

If we then move to Slide 5 and the LCP segment, where you could see that sales in the LCP segment was SEK 4.450 billion in the quarter, that was an increase of 7.4%, of which 1.1% was organic. During the quarter, sales slowed down due to the expiration of the large Danish contract, as Thomas was mentioning before, where only residual volumes were delivered in the quarter and compared to last year's sales for the same quarter, we dropped approximately SEK 250 million in sales.

However, we saw very strong sales increase in both public sector and large corporates outside the Danish public sector. Availability of standard hardware continues to be good. And in this quarter, we could also see clear improvements when it comes to the more advanced product categories.

From a geographic perspective, growth was strong in all countries outside Denmark but strongest in the Netherlands. Segment margin was 3.9% compared to 4.2% last year. Product and country mix was positive to the margin, while inflation put pressure on costs affecting margins negatively.

As in SMB private label product effect margins and result positively in the quarter, and we continue to see really good progress in the Benelux region with great potential. Segment results for the quarter was SEK 173 million, which was up SEK 1 million from last year.

We move on to net working capital on the next slide. So net working capital at the end of the quarter was SEK 229 million compared to last year's negative SEK 433 million. Sequentially, the net working capital was down from SEK 336 million. The higher net working capital compared to last year is mainly an effect of lower accounts payables as purchasing was low due to the ambition to reduce inventory.

If we look at the details, we can see that inventory in the quarter was SEK 1.220 billion, 600 -- that was SEK 39 million down from last year and SEK 390 million, down from Q1. This is the result of a better availability and improved processes in regards to inventory management, and more about inventory a little bit later in the presentation.

Accounts receivables was up SEK 237 million mainly as a result of higher sales volume, but also the mix change towards more LCP with slightly longer payment terms in SMB. If we look at the accounts payables, they were SEK 3.428 billion, this was SEK 356 million lower than last year. The majority of this effect of low -- it comes from lower purchasing volume due to the active work of reducing inventory levels.

As the supply chain situation is now improving and our way of operating, mainly in the Benelux is being changed. We continue to believe that inventory will come down to the more normalized levels at around SEK 1.1 billion during the year. This makes us continue to be in our target range of negative SEK 100 million to SEK 200 million in net working capital.

If we look at leverage, as Thomas said before, net debt in relation to rolling 12-month EBITA at the end of Q1 was 4.4%, where our target is to stay in the range of 2% to 3% currency differences and lower results affected net debt and leverage upwards during this quarter.

If we then move to look at inventory in some more detail on the next slide. Here you can see, as we said before, total inventory level at the end of Q2 was SEK 1.220 billion compared to last year's SEK 1.259 billion, and last quarter then of SEK 1.610 billion. And as you can see in this graph, the main improvement comes from the customer-specific inventory, where the inventory value came down with SEK 338 million, and this is actually the result of mainly in the Benelux, but also in the Nordic a joint effort between supply chain and sales and bringing customer-specific inventory down. We also have actions in place to further reduce the inventory levels down towards the SEK 1.1 billion as we have stated before.

Having said that about inventory, let's move to the next slide, cash flow. So cash flow for the quarter was negative SEK 19 million compared to SEK 15 million positive last year. Looking at the parts, we can see that cash flow from operating activities before change in net working capital was SEK 122 million. This is significantly lower than last year, mainly coming from a lower operating result. If we then look at change in net working capital, which is positive SEK 122 million, slightly above last year where the main difference release being the low accounts payable due to inventory reduction. Otherwise, this change would have been bigger. And sequentially, we will see that coming in the next quarter.

Cash flow from investing activities was SEK 64 million and of which SEK 52 million was related to IT investments, and this should be compared to in total of SEK 75 million last year. And cash flow from financing activities was SEK 205 million negative compared to SEK 298 million negative last year. This is mainly attributed to amortization of debt.

Total investments. Total investments amounted to SEK 79 million compared to last year's SEK 90 million, and the CapEx related to IT development was SEK 53 million compared to SEK 40 million last year. Out of the SEK 53 million, SEK 34 million is related to the project of moving Dustin onto the same ERP cloud-based system. Investment in tangible and intangible assets decreased from SEK 40 million last year to SEK 15 million for Q2 this year. And finally, investment in assets related to service provision was SEK 12 million compared to last year's SEK 9 million. All in all, SEK 64 million out of the SEK 79 million in CapEx was affecting cash flow, the other 4 changes in lease or rent contracts.

And by that, we'll move back to Thomas.

[Thomas Ekman, executive]

Great. Thank you, Johan. And let's move to next slide here. Just to recap on our updated financial targets and our goals. As you saw in February when we had the capital market update, we aim for a 10% 3-year annual growth rate of EPS. And those -- that target EPS growth will be supported by an 8% organic target growth for SMB and a 5% organic growth for LCP, with segments margins according to our new segment reporting where we aim for more than 6.5% for SMB and more than 4.5% for LCP in the coming 3-year period.

We keep our leverage target to be between 2 to 3x EBITDA, and we are working on our way down on that, as Johan mentioned. And we also keep our dividend target to distribute at least 70% of net profit, obviously, depending on the financial situation at the time. And then we want also to put more -- even more light and emphasize even more on our CO2 target where we aim to decrease our emissions with 25% in the coming 3 years, contributing to our already communicated and ambitious 2030 commitment of the CO2 neutral. So these are our targets that we will follow now for the coming 3 years ahead and continue after that as well, obviously.

If we then move to the next one, where we have a new segment reporting, this is a fairly busy slide, but you are used to that. Where we have a new segment reporting and supporting the cost focus we have, where we have merged B2C into SMB. And seeing that, that is, of course, more logic to do now, when B2C holds for 2% of sales, and it also reflects our -- how we are organized.

And this means that the new segment margin target for the segment as well as the new target for remaining central costs, which is now also more clear and -- or clear as central cost. And we do these changes, of course, in a way that we want to increase transparency and the clarity and our understanding on how we look now given that we have developed a lot since the IPO and it looks a bit different than we did at the time a couple of years ago. And as you saw this morning, we are also merged our 2 LCP organization to 1 which will give us efficiency, 1 way of working and better customer across countries and across the group.

And if we then continue to the next slide here, our path to decrease our CO2 impact. I mean, obviously, we have our clear targets towards our 2030 commitment becoming CO2 neutral and we see and we can also drive the trend towards sustainability and where sustainability is truly becoming an integral part of buying IT in our parts of the world in our markets. We aim for a 25% reduction in CO2 equivalents per SEK 1 million sales in the coming 3 years. We are doing and have done a lot of actions to improve and reduce like, for example, our takeback offering, and we have linked our financing to our sustainability targets, and we are also compliant with TCFD, as well as taking on a full value chain approach, including Scope 3 in our work.

There is obviously a lot more to do and more potentials where we will, as soon as possible, sell more refurbished products online. We will also use -- or we are using and start to use even more our data that together to help our customers to make the right choices. And not the least, of course, make use of our size and scale to influence our vendors, our suppliers, and by that push the whole value chain to forward to more sustainable solutions and improved ways of working. So we have clear targets in place for achieving this.

So before moving in then to Q&A, let me just sum up the results on the next slide here. Net sales grew 2.2% to SEK 6.2 billion -- SEK 6.272 billion. Group organic net sales growth was negative 2.4% in constant currency. Organic growth in SMB was minus 10% and LCP was plus 1.1%. Gross profit of SEK 914 million compared to SEK 904 million last year and gross margin at 14.6% and margin change is due to the sales mix with a higher share of LCP sales, but it's also counteracted by positive product mix as we were into before within LCP, which is great, and of course, sequentially very improved margin, which is good to see. Adjusted EBITA was SEK 212 million and adjusted EBITA margin of 3.4%, a clear sequential improvement here again versus the 3.0% in Q1. And margin was mainly affected by higher share of campaigns and cost inflation as well if you compare to last year.

EBIT was SEK 152 million, and EPS amounted to SEK 0.72. And cash flow from operating activities was SEK 250 million. And the leverage, as we mentioned before, here was 4.4 in the past 12-month period.

Yes. And on operational highlights, obviously, Johan Karlsson has been appointed as new President and CEO. We have updated our financial targets and segment reporting. And very encouraging, we have reduced the level of customer-specific inventory pushing ourselves ahead of our plan on that.

Synergy extraction on track with the clear effects of -- as of second half of '22, '23, and with full effect expected in the next financial year '23, '24. And as I said before, as an example, we have merged the 2 LCP organizations that's the next step of increased scalability and knowledge sharing and of course, customer offering to improve that.

So to summarize, in recent quarters, market development has been characterized by general economic uncertainty and a cautious trend in some of our customer segments. The performance was in line with expectations and in historical terms reflected the pattern I must say, in our business. We are demonstrating progress towards our target scenario presented in the capital market update and we have seen some stabilization within SMB in the later part of the quarter, which makes us cautiously optimistic ahead of the upcoming quarters. We are on the right path in a turbulent time, and it is, of course, with complete confidence that I hand over to lead ship to Johan Karlsson as the new CEO of Dustin from Monday.

Johan has, as you know, extensive experience and solid knowledge of Dustin and in all the markets we operate. And also, Dustin is well equipped to address the short-term turbulence in the market and is also well placed to meet the strong underlying market trends. And obviously, I want also to take this opportunity to extend my warm thanks to all employees, customers, shareholders and other stakeholders for your confidence and a fantastic time at Dustin, which I will continue to follow from another level. And I wish, obviously, also Johan, the best of luck in everything with the team and continued journey ahead.

Great. I think with that, we can conclude our presentation and take any questions you might have.

[Operator]

The next question comes from Mikael Laséen from Carnegie.

[Mikael Laséen, analyst]

Okay. Yes, I have a few questions. Starting with your comment about signs of stabilization in the SMB segment at the end of Q2. Can you sort of explain what you mean here, what you have seen and what this means?

[Thomas Ekman, executive]

Yes, for sure. I mean what we see was -- or what we saw in the beginning of the quarter, thanks for the question, by the way. But what we saw in the beginning of the quarter was December was weak, and it was weaker over, especially in Sweden, it was weak. But in all Nordic countries, it has been stabilizing. And we can see that we are fairly sort of flat in the end of the -- in the later part of the quarter. And that makes us -- and we can see continued development there.

And that said, that makes us cautiously optimistic of that we actually are seeing the same trends as we have seen before in economic crisis, where the SMBs, as said, they are early to react and they reacted a lot in first quarter and also continued in the beginning of this quarter. But now we can see that it's stabilizing, and that also shows that I mean continuously, the SMB customer -- our SMB customer also wants to do -- continue to do business with their customers and that is, as said, cautiously encouraging to see.

[Mikael Laséen, analyst]

Okay. And was it flat month by month? Or was it year-on-year? Just to understand the trend in the quarter?

[Thomas Ekman, executive]

Yes, it was flat also from year-on-year, but also from -- sorry, from month by month. But -- and so it was -- yes, it was stronger in the end of the quarter than in the beginning of the quarter.

[Mikael Laséen, analyst]

Okay. Yes. And can you go in more detail, talk about the market situation, the supply of IT products standard and advanced where you are in the compared to last quarter and the quarter before and what you see ahead? And the demand side, how that is affecting the volumes and the prices?

[Thomas Ekman, executive]

Yes. What we can see, I mean, this is obviously a mix of what all the things we do internally versus how the market is. But if you look at the market, we see, as we said also before is that there is a much more stable delivery and the supply chains are much more in balance now than they were during the fall or during the last quarter and also a year ago.

And as you remember, there was a lot of imbalances and products were coming and China was opening and closing, and now it's more back to normal situation and which is also very encouraging to see that the supply of more advanced products, especially for -- that we sell a lot to the LCP segment. That is also coming back to play in a much better way, which is then and has translated to a better gross margin. So I think that we -- at least as it looks right now, during this quarter, it seems like we have -- or we see a much better balance in our procurement and in our -- in the supply chains.

[Mikael Laséen, analyst]

Okay. And just curious what I'm following up on this. I mean, the mix shift towards more advanced IT products, how significant is that? What is the magnitude in improvement and -- is it fair to assume that this situation could continue and support the LCP margin also in the coming quarters? Or is this more of a temporary improvement there?

[Johan Karlsson, executive]

I think we will move back to more normal share of advanced versus standard in the coming quarters. It's improved a little bit during this quarter. And I think the margin effect, hard to calculate, of course, on exact numbers. But I think on the gross margin level, you could feel that there is a support of maybe 0.2% to 0.4% additional margin coming from the advanced side this quarter. So it's not -- it doesn't change the world, but it's at least positive to the total margin levels.

[Mikael Laséen, analyst]

Okay. Got it. And my final one, if it's okay, is on the cash flow and the outlook that you had on the last slide, net working capital, comment that, are coming down from plus SEK 300 million to minus SEK 100 million. Can you talk about what you're doing exactly to take it -- to take net working capital to those levels? And if this is fair to assume already by August this year?

[Johan Karlsson, executive]

Yes. I think we're doing a couple of things in the area of net working capital that we believe will take it to the levels we were around our target. One is obviously to continue to bring down inventory to the 1.1% level. And the other 1 is to work with the synergies as we are pooling purchasing together in the whole group, where we can ask for better payment terms. We have seen that come through in -- I would say, 4 or 5 distributors so far, and we will see that effect partially in Q3 and I would say, almost fully in Q4. So there, you will see better account payables coming from the terms change.

And then finally, we are setting up a whole new process for collecting receivables in the Benelux region where I would say it's a bit more challenging situation to collect there than it is in the Nordics, and we need to be more on our toes to collect money in that region, and that we have put in place. And there, we believe that can improve receivables towards, let's say, negative SEK 100 million to SEK 200 million goal. So these 3, I would say, are the key components to bring it down with yes, approximately SEK 300 million more, or SEK 350 million more in that range.

[Mikael Laséen, analyst]

Okay. Got it. On the payable side, the distributors that you have new terms with. Those are in place, but how many more are -- do you still have to renegotiate on the change?

[Johan Karlsson, executive]

They are negotiated but not in place in all the distributors. I think there are maybe 1 or 2 left to be negotiated. But as from the agreement we have now, they should all be in place from if I'm not incorrect, I think from the latest 1 from the 1st of May. So we are, as we speak, let's say, collecting them as synergies.

[Mikael Laséen, analyst]

Okay. Got it. So this is more or less in place that payables can go to the level where you -- what you highlighted in the Capital Markets presentation, I guess.

[Johan Karlsson, executive]

Yes, yes. I think this is -- I mean we've talked about that before that we balance, of course, payment terms with other terms towards the suppliers. But maybe we have pushed a little bit harder on payment terms now in order to make sure that we get back to normal levels on working capital.

[Operator]

The next question comes from Klas Danielsson from Nordea.

[Klas Danielsson, analyst]

So just a couple of follow-ups and another couple of questions from my side. If I understood correctly, it's sort of that 0.2% to 0.4% -- percentage point improvement on the product mix. Is that sequentially, I guess, from Q1? That's the first question. And then I was just wondering, is the rest the kind of Danish contract that's churned? Or could you also quantify how much support that is giving on the gross margins would be super helpful.

[Johan Karlsson, executive]

Yes. I mean, yes, it's sequential, just first -- answer the first question. Second question is that -- you could say that the Danish deal last year was about SEK 350 million at very low margins. And we have replaced them with average margin deals compensating that. So I think you can get that from a mathematical perspective, the impact it has. But that's the way it has panned out in the quarter. The neutral sales development compared to last year is actually a negative in Denmark and then positive in all other countries compensating.

[Klas Danielsson, analyst]

Okay. Okay. And then I mean if you just look at the gross margin in total over the coming few quarters, I guess you're guiding that it should come down a bit from these levels? Or am I interpreting that correctly as to be very clear?

[Thomas Ekman, executive]

No. Last year -- did you...

[Klas Danielsson, analyst]

Just from the comments on the product mix being better and then that coming back a bit, that's 0.2% to 0.4% levels basically?

[Johan Karlsson, executive]

Yes. I think we have -- I think, honestly, we have -- we are set up for at least continue with the volumes we have even improved them a little bit as we are getting back to more normal product mix. And as we are catching more new contracts at better levels than the 1 we lost in Denmark. So I think it can continue to improve. Obviously, it will be some ups and downs. But trend-wise, it should go up, yes.

[Klas Danielsson, analyst]

Okay. Very helpful. And then just ending off on the cash flow side, I mean clearly, a big inventory release, then you have some kind of offsetting in the liability side. On those liabilities, do you expect that to swing back in the coming quarters? And then also on the inventory side, do you see any additional scope to kind of bring that down lower than the SEK 1.1 billion? Or how should we think about that?

[Johan Karlsson, executive]

I think the SEK 1.1 billion -- I mean, we set the SEK 1.1 billion as a target because it was -- if you added the different entities together before the inventory started to go up, that was about the level we have. I think we will regroup as we reach SEK 1.1 billion and see if we can do better than that because, obviously, we don't want to have more inventory than we need to. So I'm sure we will come up with a target that is improving from the SEK 1.1 billion, but that's first hit the SEK 1.1 billion.

When it comes to the net working capital in the quarter, it's really hard to reduce purchasing at the same time because when you reduce purchasing to reduce inventory, you do unfortunately get less payables, which is good, but affects the working capital a bit. So as soon as we are back into stable purchasing, i.e., stable inventory, that will be on a lower level than before. That will improve as well.

[Klas Danielsson, analyst]

Okay. Okay. Fantastic. I think I'll close out there.

[Thomas Ekman, executive]

Okay. Thank you very much, Klas. Thank you.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Thomas Ekman, executive]

Okay. Very good. Thank you very much, everyone, for participating and listening in. And thank you also for audience here, and we look forward to meet in other opportunities in the future. Thank you very much, and have a great day.

[Johan Karlsson, executive]

Thank you.

[Thomas Ekman, executive]

Bye-bye.

[Johan Karlsson, executive]

Bye-bye.