Dustin Group AB

STO:DUST

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to today's Q3 report conference call. [Operator Instructions] I must advise you that this conference call is being recorded today, Wednesday, 3rd of July 2019.I would now like to hand the conference over to your first speaker today, Thomas Ekman. Please go ahead.

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

Thank you very much, operator, and good morning, everyone, and most welcome to our third quarter presentation and conference call. Hope you had a good morning so far. Here on our side of the call is myself, Thomas Ekman; we have Johan Karlsson, CFO in the room; and Fredrik Sätterström, Head of IR in the room as well.So today, we present our third quarter for this year, where we see a very strong total growth as well as high organic growth. SMB shows good total and organic growth and LCP continues to perform. We are also continuing taking several steps to further improve our long-term profitability, but let's come back to that now and go through the quarter in more detail.So going to Slide 2, Dustin at a glance. Many of you know us, of course, but just a quick run-through of who we are for you who you are new in the call. Dustin is a leading IT e-retailer with a wide range of hardware and software and related service and solutions to that. We have a centralized warehouse and efficient logistics platform that can ensure fast and reliable delivery to our customers. With the addition of high-level IT expertise and competitive pricing, it enables us to meet the needs and demands of primarily small- and medium-sized businesses but, of course, also as well as large corporates, the public sector and also consumers. 94% of our business is B2B and 6% is B2C. Just a little less of half of our sales, 46%, comes from Sweden and 14% to 19% comes from Norway, Denmark and Finland, respectively and now 6% 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 forces. Overall, we are well positioned in a growing market and are benefiting from underlying trends, such as an accelerating online market of course, strong demand for mobility, managed services, security and the cloud-based solutions. That's us in a short nutshell.So moving on to Slide 3 for some highlights during the quarter. This quarter, we have portrayed as a quarter with very strong growth and continued investments, and net sales grew with 28.7% to SEK 3.169 billion where organic growth was at a good 15.3%. The growth was fueled by the strong organic growth as well as completed acquisitions. Of the organic growth, SMB came in at 6.6% and LCP at 25% and B2C at minus 5%. It is very good to see that SMB continues at good organic levels and, of course, that LCP really delivers. Gross profit increased to SEK 531 million compared to last year's SEK 396 million, giving us a gross margin of 16.8%, up from last year 16.1%. Our adjusted EBITA rose 14.7% to SEK 124 million compared to last year's SEK 108 million and that gives us an adjusted EBITA margin of 3.9% for the quarter. The margin as such was negatively affected by the sales mix in this quarter with large LCP deals with slightly lower margin and large volumes giving us the lower percentage as well as the push on marketing and additional resources put in the organization for service and solutions. As you also can see, we have a high degree of items affecting comparability this quarter at a total of SEK 26.2 million, and where over SEK 18.5 million of those is acquisition-related costs this quarter and SEK 7.2 million is related to our online platform launching in the Netherlands. And as a consequence of that, earnings per share came in at SEK 0.54 compared to last year's SEK 0.87. Net debt ratio is within our frame at 2.9, and cash flow from operating activities came in at SEK 101 million. Other operational highlights worth mentioning is as previously announced, we made 3 acquisitions this quarter and we are now also starting to consolidate our Nordic data centers and sites going from 14 down to 4, 1 in each -- every Nordic country. We have also taken the decision to start automation of our central warehouse in order to increase productivity, and we are working, as I said, intensively to launch our online platform in the Dutch market later this year.Up more on that later on in the presentation. Now, Johan, moving to Slide 3 will you take us a bit deeper in our segments and financials?

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

Yes. Coming from Slide 3, moving to 4 and some more details and starting with the SMB segment. So we continue to grow strongly, as Thomas was saying, in the SMB segment with total growth in the quarter ending up 35%, of which 6.6% was organic. The acquisitions during the quarter but also during last year have a strong impact on total growth, contributing with almost 28% of growth for the segment. Segment result ended at SEK 142 million or 19.7% about last year. Margin, however, was down from 11.3% last year to 10% in this year. The continued investment to build the service and solution business have affected margins in the quarter as we are spending more on both marketing and resources supporting the sales and delivery organizations for services. Further to that, the impact from nonintegrated companies reporting EBITA as a segment result has continued to reduce segment margin for SMB. On EBITA, however, the effect from nonintegrated companies is positive. As we are progressing with our efforts to adapt the organization to sell more services and solutions, the share of software and services is up from 13% last year to 24% this year in Q3.Then moving on to Slide 5 and the LCP segment. In LCP, we see a strong, a positive change from last year where volumes were declining. Now we have a strong growth momentum and in Q3, LCP grew by 27.3%, of which 25% was organic. The organic growth is supported by the frame agreement sales in Denmark, contributing with 15% of the growth and from large public deals in Sweden and Norway. Sales growth for the corporate customers were down from last year's double digits to slightly below our financial targets for the quarter. Segment result of SEK 80 million was up from SEK 74 million or 7.1% and segment margin was down from 5.9% last year to 5% this year. The high share of sales in key public sector frame agreements were the main reason for the margin decline.Moving on to Slide 6 and B2C. Our strategy in B2C remains the same. We focus on pricing discipline and margin before volume. The result of this was a sales decline in the quarter by 4.1%, of which 5% was organic. However, segment result was up from SEK 7.9 million to SEK 8.8 million or by 11.3%.Moving on to Slide 7 and net working capital. In total, net working capital ended at negative SEK 104 million compared to negative SEK 237 million last year. In the last 3 years, we have reported negative net working capital numbers in 9 out of 12 of the quarters. Compared to last year, the main reason for the increase was less accounts payable, mainly as a result of different mix of supplies. Accounts receivables were moving up as the business is growing. Inventory was up mainly due to the private label, where sales growth is strong and assortment is broadening. Also affecting are the new acquisitions and more use of customer-specific buffer stock adding to the inventory levels. All in all, a good quarter for net working capital with levels that we expect to continue with going forward.Moving to Slide 8 and cash and CapEx. If we look at cash flow for the quarter, it was negative SEK 504 million in total. This should be compared to last year's positive SEK 251 million for Q3.Cash flow from operating activities was stable at SEK 66 million and cash flow from change in net working capital was positive SEK 35 million in the quarter but SEK 120 million lower than last year, mainly as a result of what was mentioned before in accounts payables, where different supply mix affected the numbers negatively. Cash flow from investment activities was affected by the 3 acquisitions of SEK 536 million and in total, this affected cash negatively by SEK 547 million compared to last year. Financing activities where we repaid a loan in the newly acquired entity, Chilit, was affected by negative SEK 59 million and compared to last year, this was a difference of SEK 87 million negative compared to last year.Should I move to CapEx? We are continuing our strategic journey by investing in the launch of the online platform in the Netherlands and by building our capabilities within service and solutions. In the quarter, we spent SEK 9.1 million on developing the IT platforms, of which a high share was related to the launch in the Netherlands. For other investments, we continued to build the ability to produce services mainly via hosting and data center services.Moving back to Thomas.

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

Thank you, Johan. And then continuing over to Slide #9. As I said earlier and as Johan mentioned as well and as we have previously talked about, we see a very strong and good opportunity to launch our online platform in the Netherlands. We see that we can provide a strong value proposition in the market with our high confidence in IT, our service levels and our accurate deliveries to primarily SMBs. As an effect of our B2B launch, we will also be able to provide a wider assortment and focused offerings also to the B2C segment. However, as you know, B2B is our primary focus. And the Dutch market, as we have also mentioned before, has many similarities with the Nordics. With a high number of smaller SMBs, we have the second-highest online shopping penetration in the European Union as well as a very developed logistics regarding speed, flexibility and reliability. And after all, as you know, Holland is a flat, fairly small country with a lot of people, so it's a very good market for an online player like us. We plan to launch later this calendar year and are also preparing for a new warehouse in Veenendaal in the middle of Holland. A launch like this, of course, comes with some cost related to it. And apart from what we have taken this quarter, you should also expect further expenses at around SEK 20 million evenly split between CapEx and items affecting comparability. As everything we do, this is, of course, very exciting to launch in the Netherlands.Moving on then to Slide #10. And to -- just to repeat what we also said in the beginning -- or in the last quarter, but to show you more our latest acquisitions that we did this quarter. First Inventio.IT, which is primarily a SaaS ERP company aiming towards Danish SMB market. With Inventio we will strengthen ourselves in the Danish SMB market at first, but of course, our aim is to export the model for online onboarding of SMB ERP customers to our other markets. Then we also acquired Norisk in the north of the Netherlands. Norisk will give us a stronger market position in the north as well as give us a good confidence in managed services, especially aimed towards the health sector. And finally, we acquired Chilit in Finland, which will strengthen our position in the Finnish SMB market. Chilit is a regionally strong player within managed services as well as good knowledge in hardware sales, making it a strong complement to our already existing good business we have in the Finnish market, Finland.So -- and continuing now on Slide 11. All these acquisitions, of course, aim to strengthen us within the SMB market, paving the way for us to become a true IT partner with a combination of top-class hardware and service offerings, helping our customers to focus on their core business and to stay in the forefront. And having the formula for the SMB market with standardized and predefined offerings, we can also selectively offer those services to the LCP market then by that scale-up. For you that have followed us for a couple of quarters, you know that we see big potential in moving up the value chain using our core in selling hardware and advanced products and add-on services getting more share of wallet as well as higher gross margin. Ultimately, of course, we shall use our strength in our online engine to also cater for services and make all those services available online.Continuing now on Slide #12 and to the investment that also Johan mentioned shortly before here, where we invest in our service and supply organization. As you are aware, we are setting up a central sales and delivery organization for service and solutions in the Nordics. We are increasing our speed of integration of our acquired entities in order to get higher throughputs and volumes through our services factory, if I may call it that. At the moment, we are a bit subscale, as you are in the beginning when setting things -- set these things up, but as I said, with high volumes and further integration, efficiency will continue to improve. This we do, of course, to deliver an even better customer experience where we utilize the skills we have acquired, develop our own offerings, and of course, by that, generate also economies of scale. In this work, we are also optimizing and consolidating our small data centers and sites, going from 14 down to 4, 1 per each country in order to keep the important local presence. This we expect will have an investment -- will be an investment around SEK 20 million and will generate an annual savings at around SEK 10 million. So it's a good case to run for. Furthermore, we have also taken the decision to start to work on the next steps in our central warehouse automation. Estimation for an investment of that is about SEK 50 million, and we expect, of course, a good productivity increase of that, of course.So, finally, before we go into the Q&A, let me just summarize the quarter. Net sales grew with 28.7% to SEK 3.169 billion, and the group organic growth came in at a very good 15.3%, with SMB at 6.6% and LCP at 25%. Gross margin increased to 16.8%, driven by a more favorable sales mix, and our adjustment EBITA grew with nearly 15% to SEK 124 million, where, though, the adjusted EBITA margin came in at 3.9%, affected by the sales mix and marketing and additional resources in the service and supply organization as mentioned before here.And as an effect of higher items affecting comparability, the EPS was at SEK 0.54 this quarter compared to last year's SEK 0.87.So all in all, a strong growth quarter with continued investments in both acquisitions and our organizational capabilities. So -- and I think this can conclude our presentation, and we are, of course, very happy to take any questions you might have. Thank you. Operator?

[Operator]

[Operator Instructions] Your first question comes from the line of Daniel Thorsson.

[Daniel Thorsson, Research Analyst]

I'll start with 2 questions in SMB. What did you do in practice in the service organization, are you staffing up? Are you doing training? Or are you spending more on marketing on your service offer? And the second one, what time frame should we expect to see margin improvements from the investments in SMB?

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

I mean, first, Thorsson, thank you for questions. The first question is all of that, more or less, but it is resources that we put into the organization, to the service and solutions organization, in order to build up, and that's also competent and it's resource in the service delivery part. So it is resource, and it's building up. And also consolidating that -- the resource that we have also acquired to get them into sort of our factory. And this, of course, I mean, this is a thing that we have -- that you, for sure, know that this will come, and now we really start to intensify the work on this in order to scale up the factory, if I may call it that. And in the beginning of those periods, of course, we are as likely to upscale as you are, but as we speed up the volume and speed up the integrations. Let's see, the time frame is -- I mean, for us, the strategy is still what we aim for. I mean, as we have said before, the -- and as you have seen before, our margins, over the cycle, we feel that we should have an organic growth of 8%, and we should have a margin between 5% and 6% and that is still a target to go for. And the target we have had is to -- within the cycle, which is up until '21, '22, that is the period where we should reach the margin targets we have. So we stick to the targets we have.

[Daniel Thorsson, Research Analyst]

Okay. And for the margin in SMB, do you think it will continue downwards a little bit here in the coming quarters? Or should we see improvements already from here on?

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

I think that you will see levels around this or slightly higher. I don't think they will go further down depending on this because the investment is there, we are continuing with that investment level that we are on now. And the key question here is to continue to integrate to get more volume into that service platform that we are building on the Nordic scale because in the end, that will be the contribution to margin that we are all looking for.

[Daniel Thorsson, Research Analyst]

Okay. That's very clear. And can you just please remind us on what sales contribution the Danish contract had in LCP in this quarter? And when that delivery is starting to fade?

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

The contribution in total is about DKK 500 million evenly spread over the quarters. So that would mean that somewhere around SEK 150 million, SEK 200 million a quarter, which is about where what this is contributing with, and that reflects then about 15% of the growth in LCP comes from that contract.

[Daniel Thorsson, Research Analyst]

Very clear. Final one. Will you launch with the Dustin brand in the online launch in Netherlands?

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

Yes. We will. That will Dustin brand. Over time, of course, that the Dustin brand will -- yes, that will -- Dustin brand all over in the Dutch.

[Operator]

Your next question comes from the line of Christopher Bjørnsen.

[Christoffer Wang Bjørnsen, Analyst]

This is Christopher Bjørnsen from DNB Markets. I was just wondering with regards to your announced effort to consolidate your data centers, could you talk a bit about what would be the main drivers for cost savings and also if you have made kind of any thoughts around potentially outsourcing the operation of those data centers to a third party?

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

Sure. I mean, the -- of course, when you do this -- of course, when we -- we have data centers, that's 14, as I said, in the Nordic, and of course, the target is to take that down to 4, 1 in each country. And of course, the cost in that can be everything from hardware to consolidation of the software within the data centers. But you take in investment in order to build up the 4 data centers where we put them, and that is primarily hardware. And they're very costly to do that, of course. Then -- and let's see, the second question was...

[Christoffer Wang Bjørnsen, Analyst]

What's the potential outsourcing?

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

Oh, potential outsourcing. Yes, yes. That had been, of course, on our agenda and still is on agenda. But before we take that further and outsource the data centers, we see the need of consolidating and give ourselves up to speed and have full control of all the data centers, and after that, that might be a thing to think of, but at the moment we believe that it's good for us to have control ourselves and run it and package it in the best way. So we'll see, but no, not for now.

[Christoffer Wang Bjørnsen, Analyst]

And just a quick follow-up on the question on the Danish public sector. Can you just remind us on how the business margin has developed on that contract through the quarter?

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

We just commented on the contract margin of the one deed in Denmark. But as you are aware, the public tenders usually come with a low margin.

[Operator]

Your next question comes from the line of Predrag Savinovic.

[Predrag Savinovic, Analyst of Consumer Goods]

This is Predrag at Nordea. You mentioned in the report that you want to increase the economies of scale and accelerate the pace of integration. What does this mean? And how will you go about doing this?

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

The -- that means that we integrate the companies we have acquired in a higher pace than we have previously done. In short, that is the answer of that. We instead are integrating -- 3 last year, we have the target of integrating 5 the coming year. So we increased the speed, and the reason for increasing the speed is, of course, to get volume into what I've previously called the factory. So we get the volume of the services and solutions that we have acquired and get those lined up and can produce the services within our services and solutions factory. So it is for us to get more volume into the service delivery factory that we are building. And that, of course, will give us economies of scale.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Super. And if you could elaborate a bit on the one-offs you take in the quarter, partly, it's M&A-related flat-outs, just expenses for transactions you've done, but the other part was some IT related. If you can -- maybe I missed it before, if you mentioned it.

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

Actually, the other part is mainly related to the launch of the online platform in the Netherlands, and it's a combination of items affecting comparability of around SEK 7 million, which is real cost, let's say, that is dedicated to that project. And the other side is part of the CapEx that we report as improvement of the IT platform is related to the possibilities of launching that platform in the Netherlands. So it's a combination of items in comparability of around SEK 7 million and CapEx of around SEK 5 million or slightly less than SEK 5 million.

[Predrag Savinovic, Analyst of Consumer Goods]

All right. And it seems that you took some extra cost in the quarter, like you said before, but is it possible to elaborate a bit on how much is marketing, how much is staff to get a better feel for the underlying margin in -- especially in the SMB segment?

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

If you would compare it to last year, I would say that more -- they are roughly the same size, the 2 areas. Let's say, marketing would be around SEK 5 million to SEK 10 million extra, and that is really to move the brand towards a more service content position. And the other, within the service and delivery organization -- sales and delivery organization for services is, give or take, the same amounts up there. Of course, we have built that up quarter by quarter by quarter, and that's why it's I think now on the level where we are quite comfortable. What we now need to do is what Thomas was commenting on before is we need to fill that machine with more volume and the only way to do that is to integrate the acquired companies at a higher speed. So that's what we are trying to do.

[Predrag Savinovic, Analyst of Consumer Goods]

And for the coming quarters, would you still expect to see the same kind of extra marketing on top?

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

I think over time, we will have to invest in marketing to -- let's say, to move the brand position a little bit, but it will vary between quarters. I mean, it's not so easy to say that it will be at this level all quarters going forward. It will be -- as before, it will vary a bit between the quarters.

[Predrag Savinovic, Analyst of Consumer Goods]

Okay. Got you. And one final for me. Again, on the SMB segment, the margin that comes down, it's a bit hard to square it. I mean, okay, so it takes some additional investments here, but is there any changes to the competitive landscape as well that causes some margin pressure? And then on the other hand, shouldn't we be seeing a slightly better margin since you typically acquire companies at higher margins than yourself, which you then integrate in the SMB segment also?

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

Over time, for sure, the acquired companies would add to the margins, the ones we are acquiring. That still holds true. I think in combination with the newly acquired entities, they are sometimes -- there is a certain, let's say, introduction cost within the newly acquired companies. So they don't really contribute in the first month or 2. As we have acquired them pretty recently that effect was obvious in the quarter. But over time, that will be positive contribution coming from them. And then obviously, trying to fill the volume in the service and solution platform on the Nordic scale, that will also contribute to the margins going forward. And that they are, let's say, at the beginning of the journey of efficiency, let's say, in the service and solutions area. So that will improve going forward.

[Operator]

Your next question comes from the line of Erik Elander.

[Erik Elander, Research Analyst]

So I had a question actually on the Danish framework agreement. So what is typically the margin on the first year of, so to speak, early stage deliveries compared to the margin which you have in, let's say, year 2 or 3 on the same framework agreement?

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

I think it's fair to say, I mean, as we mentioned before, these contracts start off with a significantly lower margin than average, let's say, and over time they will improve, as you're saying. The magnitude of that change depends a little bit how the contract is stipulated, what we can add, if we can sell other product types to it or not, or if we are bound to only sell one type of SKUs, let's say, PCs, then the margin will improve slightly, let's say, over time. In this case, we believe that the margins will be up maybe from the beginning level with 1% to 2%. So it will improve, but it will always be, let's say, dilutive to the average margin to take a contract of that volume.

[Erik Elander, Research Analyst]

Got you. And the second question. So when do you expect the cost to be taken for the decreasing of number of data centers from 14 to 4? You expect a cost of SEK 20 million and then annual savings of SEK 10 million, so when is the cost expected to be taken? That's number one. And number two is, when do you see a full run rate of this cost saving of SEK 10 million per year?

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

If we take the first, let's say, the project cost of closing down and starting up the data centers, that will be mainly CapEx and not real, let's say, P&L cost, and it will be done through many smaller projects actually. So one, country by country, we will move around the countries throughout next year. It will start in September and continue all the way through to August next year.

[Erik Elander, Research Analyst]

All right. Perfect. And this is actually going to affect -- I mean, the annual savings will affect the SMB area, that's right?

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

Yes. That's -- I think, actually the savings will be realized with some lag obviously after the move, but it will come gradually throughout the year.

[Erik Elander, Research Analyst]

Throughout next year?

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

Yes. Exactly.

[Operator]

And your next question comes from the line of Christoffer Bjørnsen.

[Christoffer Wang Bjørnsen, Analyst]

Just a follow-up from me on the cost savings. Is that primarily on the P&L or will you see some savings on the CapEx side as well, I expect?

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

It will be primarily on the P&L and primarily on, I would say, let's say, harmonized maintenance and support.

[Operator]

There are no further questions at this time. Please continue.

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

Okay. Very good. Thank you very much.

[Operator]

Oh, we have one question coming from the line of Mikael Laséen.

[Mikael Laséen]

Just if you can summarize maybe the margin development in the quarter and what to expect maybe in Q4? Is it fair to see on sales marketing activity, the underabsorption effect for the SMB side of Danish, and in addition you will have increased costs for integration of the acquisitions, data center cost, et cetera. Can you maybe summarize what to expect going forward? What -- would be great.

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

Well, I think, for Q4, if we -- if that's where we are, let's say, looking at first, as you know, the Q4 numbers usually are quite heavy on the public side because we have most of the rollouts towards schools and public sector is during the summer. So usually, we have a high share of LCP in that quarter. That is the normal seasonality, I would say, on sales. This year, it will be -- of course, they are continuing with the Danish still, so that will be no difference. That continues throughout the Q4 also being, let's say, organically growth numbers high. In terms of the data center investment, it will primarily happen as from September, maybe little bit effect on the Q4, but that will be not significant, I would say. In terms of the preparations for the launch in the Netherlands, that continues in full steam ahead and will be similar to the numbers I would say that we have in this quarter because it's the same team doing the same work, going forward. In terms of SMB and service and solutions, I would say that there, as is always with SMB, you would see slower changes or lower volatility when it comes to both the positive and negative sides and as we are filling the factory with more volume on the service and solution, margins should slowly but clearly pick up a little bit. That depends a little bit how much volume we get into the factory, I would say. So that's probably a little bit harder to adjust or to evaluate at the moment.

[Operator]

There are no further questions at this time. Please continue.

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

Okay. Very good. Well, thank you very much, everyone, for participating. And as I said, we summarized the quarter as a strong quarter in terms of growth with continued investments in the acquisitions and organizational capabilities. And with that, we wish you all a happy summer and sunny summer, and talk to you soon again. Thank you very much.

[Operator]

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