Dustin Group AB

STO:DUST

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Dustin Q3 presentation for 2022, 2023. [Operator Instructions] Now I will hand the conference over to the CEO, Johan Karlsson; and COO, Alexandra Fürst. Please go ahead.

[Johan Karlsson, executive]

Good morning, everyone, and warm welcome to this Q3 presentation from Dustin Group. My name is Johan Karlsson, I'm the CEO. With me here in the room, I also have Alexandra Fürst, who is the COO of Dustin. She will help us to better understand the work we do with net working capital and investments later on in the presentation. Also in the room is Fredrik Satterstrom, Head of IR. Let's move to Slide 2 and kick off the presentation with a short introduction to Dustin.Dustin is an IT reseller with it stays in IT hardware and software products. As you can see in the graph up to the left, 86% of sales is IT hardware and 14% is software and services. Our assortment is primarily sold online. 60% of sales go through our online platform. The share in the Nordics is about 80% and in the Benelux, 50%. As you know, we have recently launched our online sales model in the Benelux, and the aim is to move to similar share as in the Nordics when it comes to online sales. We are present in 6 markets in Europe with our main markets being Netherlands and Sweden. And as you can see, our key customer focus is B2B representing 98% of sales. With that said, let's move to Q3 summary on Slide 3. In the quarter, we see some areas with really strong performance and others where we have challenges. We have in the quarter continued to develop Dustin in accordance with the plan that we shared with you in our capital market update earlier this year. I'm particularly proud of the team as we have in a challenging market, being able to develop our business and improve gross margins and at the same time, reduce net working capital back towards the targeted levels. The low demand in all our markets is continuing to affect net sales. Net sales for the quarter was SEK 5.592 billion or 5.3% below last year. The organic growth was negative 9.4%. And as before, we see stronger performance in LCP than in SMB. LCP's organic growth was negative 5.5% and SMB was negative $17.4 million. During the quarter, we have been able to improve our gross margin, mainly due to strong pricing discipline in SMB and due to phasing out of low-margin contracts in LCP, but more about that later when we talk about the segments. In total, gross margin was up from 14.3% last year to 15.3% this year and gross profit was up from SEK 842 million to SEK 857 million. Adjusted EBITDA at SEK 169 million compared to SEK 201 million last year, resulting in an adjusted EBITDA margin of 3.0% compared to last year's 3.4%. Items affecting comparability was SEK 25 million, mainly attributed to the integration of former Centralpoint and Vincere Groep in the Netherlands. EBIT was SEK 97 million compared to last year's SEK 140 million, and EPS was down from SEK 0.75 to SEK 0.21 for the quarter. Cash flow from operating activity was strong, coming from the reduction of working capital and came in at SEK 431 million positive compared to last year's negative SEK 277 million. Leverage at 4.5% was above the company target of 2% to 3%. If we look at some of the operational highlights of the quarter, we can note that the new management team now has been formed by the recruitment of Jenny Ring, who will be the EVP for People, Culture and Sustainability, who already started; and by Julia Lagerqvist, who will take over as CFO in December. Further to that, we have extended our financing facility with 1 year, now expiring in October 2025. The synergy extraction is moving according to plan. And for the SMB launch in the Netherlands, we now see 500 new online SMB customers coming in every month. A really good success there for the online team in the Benelux. I then move to some more detailed numbers on S&P on Slide 4. So our sales in the SMB segment was SEK 1.654 billion or 16.2% below last year, where the organic growth was negative 17.4%. The economic uncertainty continues to affect the demand in the market. This is especially true for small and medium-sized customers. In the quarter, we have seen no difference between size of the B2B customers and the demand. However, for consumers, sales is stable on last year's level. In the quarter, we have seen lower sales of computers and mobile phones as these categories are more affected by the economic uncertainty. Service share of sales continues to be around 12%, but the mix is moving towards services rather than software. The standardized managed services launched in the Nordics continues to deliver double-digit growth. Gross margin developed positively in the quarter, mainly due to a strong product mix with less computers and mobile phones, combined with strong price discipline in a price-conscious market. Inflation puts pressure on the cost base and due to the shortage in sales, the cost base burdens the segment margin that ends up at 3.9% compared to 5.5% last year. Total segment result ended at SEK 65 million compared to last year's SEK 109 million. We then move to Slide 5 and LCP. So sales in the LCP segment was SEK 3,928 billion, in line with last year. The organic growth was negative 5.5%. The expiration of the Danish contract affected the growth by 8% in the segment. The public customers group continues to perform well in all markets, while the corporate sales slowed down somewhat in this quarter. The availability of all hardware categories is now back to normal. And from a geographical perspective, sales was strongest in the Netherlands, Finland and Belgium. Gross margin developed positively coming from a stronger product mix with more advanced hardware and less computers sold. Further to that, less volumes in low-margin public contracts improved the gross margin. Positive to those margin was also the continued good development of private label sales. Now the strong sales is coming from the launch of our private label products in the Benelux. Despite the high inflation with pressure on costs, segment margin developed positively and ended at 3.6% compared to last year's 3.0%. Segment result was SEK 141 million, up 18% above last year, a very strong performance by the LCP team in this quarter.I will now hand over to Alexandra Fürst, who will take us through the development of net working capital, starting on Slide 6.

[Alexandra Fürst, executive]

Thank you, Johan. Our net working capital is improving towards our target range of negative SEK 100 million to negative SEK 200 million. And we are closing the quarter on minus SEK 22 million versus last year, plus SEK 4 million, and this is an improvement from Q2 with SEK 228 million and an improvement of SEK 336 million versus Q1. On total inventory, we decreased with SEK 439 million versus last year to a level of SEK 1,031 million. And the decrease is to the larger part related to customer-specific inventory, and I'll come back to some more details on the next slide. Accounts receivable increased by SEK 348 million compared to last year, mainly related to higher business volumes at the end of the quarter. Accounts cable is lower than last quarter, mainly due to lower purchase volumes as a result of a decrease in inventory and lower business volumes overall. Moving on to Slide 7. Let's look at some details on the inventory levels. Inventory decreased by approximately SEK 190 million in the third quarter compared to the second quarter and as stated SEK 439 million from last year's Q3. We find a decrease in all parts of our inventory but mostly in our customer-specific one. The core inventory, which is mainly attributable to our online sales decreased slightly versus the second quarter and also compared to a year ago. This is due to, amongst others, optimized stock keeping and procurement of selected product categories. Inventory of private label products decreased slightly compared to the second quarter, but increased by SEK 37 million year-on-year due to the successful launch in the Benelux. Customer-specific inventory decreased the most by approximately SEK 150 million compared to the second quarter. This inventory level of SEK 1,031 million and its decrease is made possible by active collaboration with customers and partners, benefiting from Dustin's strong position in the market that Johan talked about initially. We also benefit from the changes done to our procurement processes and foremost in the Benelux region. With this, we conclude a quarter where total inventory already is below the year-end targeted level of SEK 1,100 million. We aim to stay around this level for coming quarters and feel comfortable in this by our procurement changes implemented and a strong focus on inventory levels.Handing back to you, Johan.

[Johan Karlsson, executive]

Thank you, Alexandra. I think a really good work from the team here to deliver on our target when it comes to inventory levels. If we now move to cash flow. Cash flow for the period was SEK 323 million compared to negative SEK 380 million last year. Looking at the details, we see that cash flow from operating activities before change in net working capital was SEK 142 million compared to last year's SEK 184 million, mainly attributed to the lower business result. And cash flow from change in net working capital was positive SEK 289 million compared to last year's negative for SEK 461 million, mainly affected by the lower inventory level as Alexandra was previously explaining and a better cash from change in accounts payables. Cash flow from investing activities was SEK 58 million compared to SEK 52 million last year, where the majority comes from the project of implementing the new IT platform. And cash flow from financing activities was negative SEK 50 million compared to negative SEK 51 million last year, where the majority is the amortization of lease debt. If we then move and look at investments. So total investments in the quarter was SEK 120 million compared to SEK 68 million last year. However, the cash investment was SEK 58 million this quarter. The majority of the SEK 58 million was CapEx related to IT development, which increased slightly from SEK 41 million last year to SEK 45 million this year. Investment in tangible and intangible assets was EUR 52 million this year compared to 10 last year. However, of the SEK 52 million, only SEK 13 million was affecting cash. This year, this should be compared to SEK 5 million last year. The noncash item, which is mainly lease contracts for offices and cars. Investment related to services was SEK 23 million compared to SEK 17 million last year and is mainly attributed to the harmonization of data centers. We then move to net debt. The net debt increased slightly in the quarter from previous quarter and from last year, net debt is up from SEK 4,450 billion to SEK 4,613 billion, mainly due to currency fluctuations. Leverage was at 4.5%, up from 4.4% in last quarter where currency affected the 4.5 number with 0.2% compared to the previous quarter. If we then move to Slide 9. On this slide, we're trying to give you an update of our short-term actions and priorities. At the top, you can see the priorities where deleverage is our top priority short term. However, margin and growth are, of course, remaining on our priority list. Deleverage, you have heard us talk about the reduction of net working capital and the positive effect that will have on leverage. We still have some ways to go, but the job with inventory is starting to give results. We're also negotiating better terms with our suppliers and part of that will be seen in improved payables that will take us to the target net working capital of negative SEK 100 million to SEK 200 million. Important to leverage is, of course, also the business results here represented by margin and growth. If you move to the middlebox margin, we are short-term working hard with cost initiatives in order to improve margins. The key component in the… This is a key component in the integration synergies in the Benelux. Further to that, the work with both private label and takeback is improving margins. Due to the market sentiment, we are also including the price discipline as a key component. In times with low demand, there is always price pressure. But here, we need to use our strong position in the market and act to preserve margins. We then move to the growth box, where we still remain with our ambition from the financial targets over time. However, with current market conditions, this is hard to meet, but we remain active and already when the market turns. With the market data we have currently, we believe this to be at the end of this calendar year. Important is that we continue to invest for the future. We do that under the umbrella of one. We spend time working with our culture so that every member of the Dustin team understands the culture and how we work together. We spent time on harmonizing the way we work in order to scale and drive down costs. We have also moved to one brand, and we are now using this and make harmonized branding campaigns in all our markets. Further to that, we work on our IT platform. Alexandra will now go through some of the key activities in this area.

[Alexandra Fürst, executive]

Thank you, Johan. You might recognize this slide from our capital market update in February earlier this year. We continue to invest in our 10 platform, and the platform is key to build our European IT powerhouse and to enable synergies. We have divided our investments into 4 different areas, all supporting our core business processes. With the platform, we will be able to further digitalize our customer journeys, easier scale across geographies and expanding to new ones and, of course, cater for efficiency and automation. This means we will, with our new platform, have improvements in many of our processes, increase our level of automation and reduce integration time for acquisitions. When investing, we always try to create benefits for both our customers and for Dustin. And one example of this is the new web portals created for our LCP customers that will be launched within short. These will enable more self-service and personalized experience for our customers and more automated processes for Dustin. We work with continuous deliveries in all areas to the extent possible, this to be able to continuously capture synergy effects and process improvements. In total, we expect 1 platform to enable synergies of SEK 60 million to SEK 90 million annually and amongst others, the back office area and general processes. Our investments related to the IT transformation is estimated to SEK 100 million to SEK 150 million annually. With this, I hand back to you, Johan.

[Johan Karlsson, executive]

Thanks a lot, Alexandra. Let's conclude the quarter 3. So the low demand in all our markets is continuing to affect net sales. And as I said before, net sales was down 5.3%, organically 9.4%. And as we've seen in the segment's result, LCP was down 5.5% organically and SMB 17.4%. Positive in the quarter has been that we have been able to improve our gross margins, mainly due to strong pricing discipline and product mix in SMB and due to phasing out of low-margin contracts and private label sales in LCP. Gross margin was up from 14.3% to 15.3%, which is really a good performance. Adjusted EBITDA at SEK 169 million compared to SEK 201 million, nearly affected by the lower sales volume and the EBITA margin at 3% compared to last year's 3.4 million. As we discussed before, cash flow from operating activities was strong, coming from the reduction of working capital came in at SEK 431 million positive compared to as negative SEK 277 million. Still leverage remains high at 4.5%, in line with Q2, but clearly above our own target of 2% to 3%. Looking at the operational highlights. It's good to see that the management team is now complete with the recruitment of Jenny Ring as EVP, People and Culture and Sustainability; and Julia Lagerqvist, who will take over as CFO in December. Further to that, we have extended the financing agreement with 1 year until October 25. And the synergy work that we have primarily in the Netherlands is paying off and giving results in line with what we planned for. And there, the launch of the SMB online engine is showing good results with new customers coming in. I think that concludes the presentation, and we can open up for questions. Operator?

[Operator]

[Operator Instructions] The next question comes from Daniel Thorsson from ABG Sundal Collier. Please go ahead.

[Daniel Thorsson, analyst]

I start off with a question here on the market and inventory. So the reduction in customer-specific inventory that you showed us in the last 2 quarters, that has likely contributed positively to sales as deliveries have been good despite a tough market. Does the lower level now mean that the outlook for deliveries in the coming quarters could be weaker as you don't have a backlog of customer-specific orders and inventory to ship out as you had just 3 quarters ago, which means that we should expect a continued drop in organic growth or at least be negative for another few quarters?

[Johan Karlsson, executive]

It's hard to predict actually. But as I said before, we believe the market will remain with low demand for the coming quarters and probably until the end of this year. So there will be -- we don't see any reduction, actually. We think it will remain where it is at the moment. Obviously, the comparable numbers of sales will become easier and easier during the next couple of quarters, but the absolute level will remain where it is now, Daniel.

[Daniel Thorsson, analyst]

Okay. Fair enough. And then second question on gross margin. It was quite strong here in the quarter, and you elaborated well on it in a few slides here, but can you say something around like-for-like gross margin except the product mix? I understand that PCs and smartphones fell quite a lot in the quarter and affected the margin in a positive way. But for any services or products have you been able to improve the gross margin on a like-for-like basis or...

[Johan Karlsson, executive]

Margins are on a product-per-product basis, quite similar to before. And the way the whole job that we need to do is to improve the mix and that we have done in the quarter in a good way, which means gross margin is up. So I think that's the whole plan that we have is to actually change the product mix towards products with higher gross margin.

[Daniel Thorsson, analyst]

Yes, I see. And related to that, you mentioned that the PC market is down 30% to 35% at the moment. Do you have any outlook for that for how long that could continue or further decelerate or accelerate the decline here?

[Johan Karlsson, executive]

The market data that we get and the experience, I would say, from previous situations like the ones we are in at the moment, we conclude that the market will remain weak for the coming 2 quarters and probably start to improve end of this calendar year.

[Daniel Thorsson, analyst]

Yes. Okay. I see. That's good. My final question is on the extended credit facility you sent out yesterday evening. You didn't mention anything about maintenance covenants, but only the covenant related to no dividends if you are about 3.5x. Have you had any trade-off there so that you got rid of any maintenance covenants potentially when extending this credit agreement or anything else we should be aware of, except what you wrote in the press release?

[Johan Karlsson, executive]

I think what is important is, of course, that we have had now the discussion and continuously have a discussion with the banks on the credit facility. And obviously, the facility is now updated to cater for the current market conditions. I think if you take specifically the dividend, let's say, limitation, we don't see that as affecting us that much because we are clearly dedicated to come back to our target of 2% to 3% in leverage, which means if we are above 3.5%, we would still question whether we should do a dividend.

[Daniel Thorsson, analyst]

Okay. But the extension has not changed the maintenance covenants in a material way that we should be aware of for. Is that how I should interpret it?

[Johan Karlsson, executive]

Yes, that's correct.

[Operator]

[Operator Instructions] The next question comes from Mikael Laséen from Carnegie.

[Mikael Laséen, analyst]

I have a few questions. First one is about CapEx. If you can say something, how we should think about that going forward? Is this a level where we should expect CapEx to be? And how much more you plan to invest in the IT platform projects? That's the first one.

[Johan Karlsson, executive]

Yes. I think Mikael, what we have communicated before is that we believe cash CapEx to be about SEK 200 million this year and next year, and the majority of that will come from the development of the new IT platform. So I think what we saw this quarter around 50 is about where we will be for the coming quarters.

[Mikael Laséen, analyst]

Okay. Great. I'm just curious about the services of the software port of your revenue, SEK 1 billion approximately in Q3. How much of this is services and how much is software? And can you say something about the profitability for this revenue stream?

[Johan Karlsson, executive]

Yes. If you think standardized recurring services, it's about half of that. And profitability-wise, we are moving on the standardized services in the right direction. We communicated before that we believe services can have double the margin of hardware, which basically would give you a 10% segment margin. and we are heading in that direction at the moment. So I think I'm looking positive on the standardized managed services that we have now to a full extent in the Nordics, and we are moving in that direction also for the Benelux...

[Mikael Laséen, analyst]

Okay. So roughly SEK 500 million is recurring services. And there you expect to have 10% margins going forward, but you're not there yet. Is that...

[Johan Karlsson, executive]

We are on the right direction in the Nordics for sure and not so far from the target. And with what we are doing now in the Netherlands with the integration of the Vincere entities and the launch of a European standardized portfolio, which we are copying from the Nordics, we believe that we can reach the same levels in the Benelux during the next maybe 2 years.

[Mikael Laséen, analyst]

And can you say something about the approximate EBITDA margin that you have in the Netherlands?

[Johan Karlsson, executive]

I would say the margins, if you would compare the margins in the Netherlands and in the Nordics are similar. So if you would look at the margin at the moment at 3.6% in LCP, that would give you -- it's about the same in the Netherlands, as you have in the Nordics. So no big difference. And the same -- the SMB, of course, is much smaller in the Netherlands where it's more difficult to say actually to compare with Nordics. But LCP gives us the same margin in the Benelux as in the Nordics.

[Mikael Laséen, analyst]

Okay. But do you have extra cost to expand and decide in the Netherlands currently and maybe non recurring nature or included in…

[Johan Karlsson, executive]

True, we have a couple of things actually happening in the Netherlands on the SMB side at the same time. We are integrating all the Vincere entities, which then you will see partly on the items affecting comparability, but also, of course, that it takes a lot of operational time and effort to actually do this integration. So it has a bit of a hampering effect on sales when it comes to recurring services. And then, of course, launching SMB is not at scale the first day. So we are subscale but growing at a fast rate. So we're moving in the right direction, obviously not where we want to be on profitability.

[Mikael Laséen, analyst]

But this is something that is -- I mean, strategic decisions that you have taken to expand the SMB side. So it's I guess most affected by the market is growing from a low level and improving the platform and...

[Johan Karlsson, executive]

You're totally right. And I think some of the components are really important now like the one brand. Now we are on the Dustin brand everywhere, so we can do branding campaigns for the SMB market in the Netherlands and Belgium at a much more efficient way than we were previously when we were on different brands. So there are positive actions that we've taken to become scalable at a faster rate also in SMB.

[Mikael Laséen, analyst]

Okay. And maybe you talked about that in the presentation, I think maybe you can remind us where you are in that journey, what you have to do in terms of platform. And I don't know what remains to be done for you to start to scale the SMB revenue in the Netherlands.

[Johan Karlsson, executive]

Yes. On the hardware side, I think we have everything in place. We have the team there. We have the processes. We are using the Nordic IT platform. So we are able to run the business the same way as we do it in the Nordics. So there, it's a matter of time and investment, of course, in the market. When it comes to services, we are integrating the entities of Vincere during the next, I would say, 3 quarters and then and launching the European harmonized portfolio of services in the Netherlands. And that work is ongoing, and that will give us, let's say, the foundation for similar business in the Netherlands and Belgium as we have in the Nordic today in Managed Services.

[Mikael Laséen, analyst]

Okay. Got it. And also if you can also comment regarding the non recurring restructuring projects that you had in Q3, SEK 24 million? What did you do?

[Johan Karlsson, executive]

Say it again, Mikael.

[Mikael Laséen, analyst]

You had SEK 24 million in nonrecurring restructuring costs in Q3. Just wondering why you have this cost and...

[Johan Karlsson, executive]

That is basically either dismantling entities in the Vincere Groep, either systems, offices or people or it is efficiency improvement when it comes to Centralpoint where we take out people as we are becoming more efficient in our operation.

[Mikael Laséen, analyst]

Okay. And how much should we expect in coming quarters when have you done these restructuring measures?

[Johan Karlsson, executive]

I think the restructuring will be done in the Centralpoint so it will be done in Q1. And in Vincere, it will be done by somewhere in Q2, Q3 next year. Then we are all done after that with the current sets we have.

[Mikael Laséen, analyst]

And during this time until Q2, Q3, you will then probably have nonrecurring charges.

[Johan Karlsson, executive]

Yes. True. Yes, that's...

[Mikael Laséen, analyst]

The final question is on the financial items, if you can say something about the interest rate you have right now and if you have any changes in this new credit facility?

[Johan Karlsson, executive]

At the moment, the debt level is about SEK 5.3 billion out of -- 87% is in euro-based currencies. And if you look at the interest rates, they are at 68% fixed. So it's quite a high share of hedging down on the interest rate side. And the average time of hedging is 2.1 years, so 2 years out, basically. We do have an increase in financing costs partly due to the market interest rates, but also due to the fact that leverage is high. But no significant change from before due to the information we had.

[Mikael Laséen, analyst]

Got it. So that means that you will be able to continue with the hedging measures in this new structure.

[Johan Karlsson, executive]

Absolutely.

[Operator]

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

[Johan Karlsson, executive]

Okay. Thank you very much for attending the Dustin Q3 quarterly results presentation, and have a really nice day. Thank you very much.