Dustin Group AB

STO:DUST

Earnings Call Analysis

Dustin's Q3: Market Challenges and Future Optimism

In Q3, Dustin Group reported a sales decline of 3.5% YoY to SEK 5.455 billion due to market cautiousness. Gross margins slightly dipped to 15.0% from 15.3%, impacted by new LCP contracts and promotion sales in SMB. Adjusted EBITA fell to SEK 130 million from SEK 169 million, with EBITA margin down from 3.0% to 2.4%. Cash flow remained strong at SEK 454 million, supported by improved working capital management. Future outlook is optimistic with the launch of AI-capable PCs and new tenders expected to drive growth in 2024, despite ongoing cost pressures and economic uncertainties.

Navigating a Challenging Market Landscape

Dustin Group's Q3 2023 earnings reveal a company grappling with a challenging business environment. The key highlight was a total revenue of SEK 5.455 billion, which marked a 3.5% decline compared to the same period last year. Particularly troubling was the performance in the SMB segment, which suffered an organic growth decrease of 10.2%. The LCP segment also saw a minor decline of 0.8%, although this was viewed as an improvement over the previous quarter thanks to new customer contracts. The company reported cautious spending behavior among its customers, indicating a broader economic uncertainty that is affecting demand.

Profitability Under Pressure

Dustin's gross profit was SEK 821 million, down 4% from the previous year, with the gross margin slightly declining from 15.3% to 15.0%. The decline in margins can be attributed to the influx of new contracts in the LCP segment that initially come with lower margins as well as promotional sales in the SMB sector. Adjusted EBITA also fell to SEK 130 million, down from SEK 169 million last year, reflecting a decrease in EBITA margin from 3.0% to 2.4%. Notably, the company highlighted the impact of cost inflation and a fixed cost base that led to negative operational leverage.

Cash Flow Resilience

Despite the overall decline in revenues and margins, Dustin demonstrated strong cash flow management. The cash flow from operating activities improved to SEK 454 million, up from SEK 431 million the previous year, primarily driven by effective working capital management. This resulted in a significant reduction in leverage, ending at 3.0 compared to 5.0 last year, a reflection of successful debt repayment following a rights issue.

Strategic Priorities and Future Outlook

On a strategic front, Dustin is focusing on optimizing costs through synergy realization from integrations and streamlining operations. The company has seen a noteworthy reduction in Full-Time Equivalents (FTEs) by 9% year-to-date, though this has not been sufficient to counterbalance rising costs from inflation and currency fluctuations. Moreover, the company's recent commitment to sustainability initiatives, including joining the Science Based Target initiative, underlines its focus on long-term viability and resilience in the face of climate challenges. Looking ahead, the management is optimistic about the gradual improvement in market conditions during 2024, driven by new product launches, especially PCs with AI capabilities.

Market Dynamics and Segment Performance

The SMB segment faced ongoing disruptions with sales shrinking to SEK 1.5 billion, indicative of a 10.9% decline year-over-year. This reflects low demand for hardware while software and services saw a slight uptick in share. In the LCP segment, sales hit SEK 4.7 billion, experiencing a modest organic decline of 0.8% but marking a sequential improvement from Q2's lower levels. Public sector contracts drove improvement in LCP, with management optimistic about further tenders in the pipeline.

Emphasis on Innovation and Circular Economy

Dustin is leveraging its take-back business model, which is currently on an annual run rate of approximately 1 million units, indicating strong demand and the strategic shift towards circularity by offering refurbished products in the Nordic and Benelux markets. This innovative approach not only opens new revenue streams but also emphasizes sustainability, aligning with broader environmental goals and enhancing competitiveness in tenders.

Stakeholder Confidence Moving Forward

The introduction of new PCs correlated with AI capabilities is anticipated to bolster demand in both SMB and LCP segments. Management believes that these advancements will enhance market prospects, encouraging an uptick in consumer confidence and spending. They estimated that while some promotional clearance may continue into the next quarter, the overall sales volume is expected to recover, supported by better market conditions.

Concluding Thoughts

In summary, while Dustin faces immediate challenges such as declining sales and margin pressures, its strong cash flow, strategic focus on cost management, and sustainability initiatives provide a solid foundation for recovery. The optimism surrounding new product launches and improvement in macro conditions signifies potential growth opportunities ahead. Investors should monitor performance closely, recognizing both the risks and opportunities that lie ahead for Dustin Group.

Earnings Call Transcript 2024-Q3

[Operator]

Welcome to the Dustin Q3 presentation for 2023 and 2024. [Operator Instructions] Now I will hand the conference over to the CEO, Johan Karlsson; and CFO, Julia Lagerqvist. Please begin your meeting.

[Johan Karlsson, executive]

Good morning, everyone, and a warm welcome to this Q3 presentation from Dustin Group. As you heard with me here in the room is Julia, our CFO; and but also Fredrik Satterstrom, Head of IR.

Let's move to Slide 2 and Dustin in summary. Dustin is an IT reseller with its space in IT hardware and software products. And as you can see in the graph up to the left, 82% of sales is IT hardware and 18% is software and services. Software and services has, in the last years, become a larger share in the total sales and has increased in importance. Our assortment is primarily sold online and 60% of sales go through our online platform. The share in the Nordics is about 80%, and in the Benelux the share is lower. However, as you know, we have recently launched our online sales model in the Benelux, and the aim is that we would move to a similar share as in the Nordics when it comes to online sales.

We're present in 6 markets in Europe with our main markets being the 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 Slide 3 and a little bit more about the quarterly numbers. As in the last 4 quarters, sales was affected by a weak market with continued general cautiousness by customers, in many of our customer groups. Sales in the quarter was SEK 5.455 billion or 3.5% below last year. In SMB, organic growth was negative 10.2% and in LCP negative 0.8%. The negative 0.8% in LCP was a significant improvement over Q2 and the result of new customer contracts.

Gross profit at SEK 821 million was down $36 million or 4%, while gross margin ended at 15.0%, down from last year's 15.3%. New contracts in LCP and high level of promotion sales in SMB affected the margins negative. Adjusted EBITA at SEK 130 million compared to last year's SEK 169 million with an EBITA margin down from last year's 3.0% to 2.4%, mainly as a result of lower gross margins and lower volumes. Items affecting comparability was at SEK 1 million as the integrations coming towards an end.

EBIT was SEK 86 million compared to last year's SEK 97 million. Positive was cash flow from operating activities that ended in SEK 454 million compared to last year's SEK 431 million, mainly coming from a strong working capital management. Leverage ended at 3.0 compared to last year's 5.0, where the main effect being the repayment of debt after the rights issue.

Some other highlights from the quarter was that we continue our focus on synergies and reducing costs, and that Dustin joins the science-based target initiatives. And last but not least, the new PC launch from all major PC manufacturers where they launched PCs with AI capacity, and we think this will be a help to drive a better market in the future.

Now let's move to some more details on the numbers, and Julia.

[Julia Lagerqvist, executive]

Thank you, Johan. We start by looking at the SMB segment on Page 4, where sales landed at SEK 1.5 billion or 10.9% below last year. And as Johan mentioned, the continued economic uncertainty still affecting demand in all markets. As in previous quarters, we saw low demand for computers and mobile phones, while the share of software and services increased somewhat just above 12% due to a healthy trend for contracted recurring services in the Nordics combined with the weak hardware sales.

There's been larger than normal promotion sales due to clearance of suppliers' stocks ahead of the launch of AI-adapted PC's, which put some pressure on gross margin. This has been partly offset by a better mix and a continued price discipline. Our cost saving programs have had a positive impact on overall cost but has been offset by cost inflation and currency effects with a weakened SEK. This I will come back to later in the presentation.

So the lower sales, combined with the largely fixed cost base has led to negative operational leverage and hence lower segment margins. All in all, the second margin ended at 2.5% compared to 3.9% last year, and the total segment result ended at SEK 37 million compared to last year's SEK 65 million.

Going to Page 5. We look at the LCP segment. And the sales in LCP was SEK 4.7 billion in the quarter, up 1.3% year-on-year helped by currency and the organic growth was minus 0.8%. This is also a sequential growth versus the low Q2. As noted before, we have some volatility between quarters. The public sector was an important driver of the improvement coming with several new framework agreements, while the performance in large corporates was slower. And from a geographical perspective, the sales performance was strongest in Denmark and Norway.

Gross margin was slightly declining in the quarter, mainly due to new framework agreements with initially lower margins. Margins was also a bit impacted by negatively by country mix. On the opposite, we saw increased share of sales support on net basis according to IFRS 15, which had a positive impact on the gross margin for the quarter. As for these, sales is only -- as for these sales only, the gross margin supported sales that becomes 100% gross margin. In addition, we had a sharp increase in take-back, which had a positive impact on margin and EBITA. Johan will come back to this later in the presentation. Costs were fairly stable, and in total, the segment result was SEK 130 million, which is SEK 141 million last year, and margin ended at 3.3% compared to 3.6% last year.

On Page 6 then, we look at our cost development. Our continuous focus on exciting synergies from integrations together with cost-cutting activities has improved the cost base mainly due to reduction in FTE's, which is down 9% from the beginning of the fiscal year '22, '23, and 5% year-on-year in the quarter. However, cost reduction activities, and reduced number of FTEs could not fully offset the cost inflation, currency fluctuations in the quarter, and the total cost was up 2%.

We continue our optimization journey. For example, we are still to capture further synergies from ERP harmonization. And overall, we aim to strike a balance between efficiency activities and being ready for when the market turns.

Coming to Page 7, we look at net working capital development. And net working capital improved with over SEK 180 million compared to the same quarter last year and ended at minus SEK 200 million. So we're back to negative numbers. This was partly driven by inventory, which was reduced by SEK 106 million versus last year and is now at SEK 925 million. Inventory is now at a balanced and normalized level where we target to stay for the coming quarters. It's a minor movements up and down, of course. Still able to deliver on our service levels.

Both accounts receivables and payables increased versus last year, mainly related to business volumes. Payables was also impacted by timing of deliveries within specific major customer agreements where we had favorable payments and timing. Overall, net working capital has bounced back from the high Q2 levels. We always have some timing effects in individual quarters, but our long-term target for net working capital remains to be around minus SEK 100 million.

We then move to cash flow and CapEx on Slide 8 and summarizing what we covered up until now. So despite the low result, cash flow for the period was SEK 340 million. Looking at the details, we see that cash flow from operating activities before change in net working capital was SEK 81 million compared to last year's SEK 141 million. The difference was mainly driven by higher paid taxes.

Cash flow from the change in net working capital was SEK 373 million compared to last year's SEK 289 million, mainly affected by the change in payables as previously described. And overall, the operating cash flow was SEK 454 million in the quarter. Cash flow from investing activities was minus SEK 65 million compared to minus SEK 58 million last year. More on this in just a few seconds. And cash flow from financing activities was minus SEK 49 million, which is flat versus last year.

Moving to CapEx. We see that the total investments in the quarter was SEK 149 million compared to -- which was SEK 65 million affecting cash flow. The majority of the SEK 65 million was capital related to IT development mainly the new common IT platform, which is key for our future operational efficiency. Investments in tangible and intangible assets was SEK 78 million, of which only SEK 20 million was affecting cash flow. The noncash items are mainly lease contracts and cars. Investments related to services was SEK 18 million compared to SEK 23 million last year, mainly linked to harmonization of data centers, none of it affecting cash flow.

And with that, I hand back the word to Johan.

[Johan Karlsson, executive]

Thanks, Julia. Let's move to Slide 9. Here, we return once again to our take-back business as this is contributing positively to our overall business results. Currently, we are harmonizing the offerings between our countries, while at the same time, move operational processes into one harmonized system. Currently, on an annual run rate in take-back of approximately 1 million units, and this number is increasing rapidly. The underlying demand is strong, and we see that a good offer in take-back gives us advantages in tenders and large corporate business. We also see that our partners acknowledge what we are doing and support us with approving us for more and more cooperation.

Next step on our journey in circularity will be to start selling used and refurbished products to our Nordic and Benelux customers, both to large ones and via the web. All in all, we see strong growth and good margins in our circular offerings at the moment.

We then move to Slide 10 and some news on sustainability. After the end of the quarter, we have sent in our commitment to join the Science Based Target initiative. This is an international framework for companies that adopt science-based climate targets to limit global warming. The framework aims to support companies worldwide to achieve net zero emission before 2050. With this application, we maintain our sustainability commitment and our committing to set short-term targets to reduce emissions in line with the latest climate science and science-based target initiative, really positive initiative from us at Dustin.

Moving to Slide 11 and a summary of the quarter. As we're summarizing Q3, we can see that the markets, as in the last year, have continued to be challenging with organic sales down 3.5%. However, we see good progress in winning new tenders in LCP and the launch of PCs with AI capacity is encouraging. Gross margin at 15.0% is slightly below last year affected by new contracts in LCP and promotion sales of PCs in SMB as the market is clearing stock to make room for the PCs with AI capacity.

Low volumes and cost inflation affected EBITA margins that is down from 3.0% to 2.4%, even though we see good progress in capturing synergies and cost focus. Cash flow in the quarter, as we heard, was really strong and showed that we have established our net working capital model also in the Benelux region. And we remain with our focus to be around negative SEK 100 million in net working capital.

In regards to the future market, we're encouraged by the release of new PCs enabled in AI and the continued improvement in the macro environment in our markets. This leads us to continue to believe that we will see a gradual improvement of the market during 2024. And last but not least, we feel that sending our submission to join the Science Based Target is the right move for Dustin.

And with that, we conclude the formal presentation of the report and we open up for questions.

[Operator]

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

[Daniel Thorsson, analyst]

So a question on the weak margin here in SMB and related to the cleanout trends that you mentioned in the end here, and increased promotional levels, are -- could you say that they are so aggressive right now because everyone knows that we will have new products in the market quite soon, which means that we will have a rapid effect upwards in terms of both not volumes, but sales and also margins as soon as these new products come to the market because the old ones will basically not be able to sell at all in half years' time or so? Or how do you see this cleanout playing out?

[Johan Karlsson, executive]

I think -- I mean, first of all, it's very positive that we see the launch of these new machines. That is clearly something that we have been waiting for. And it is -- it shows the commitment, I think, from the manufacturers when they are cleaning the, let's say, the value chain of old products, the way they do it now. They really believe in the new -- in their new launches and the new products. And that is, of course, encouraging. The timing it takes to actually see an effect of that is really hard to predict. But the activities that they are doing now is, for sure, positive for us.

[Daniel Thorsson, analyst]

Yes. And if you were to estimate or guess on the timing here, I mean, those new products, those new PCs and laptops, I guess we will be able to buy them already in the fall?

[Johan Karlsson, executive]

You can buy them actually in both B2B and consumer. I think they will gradually increase in share, obviously, because they are -- as you start to understand how good they are. But they are more expensive and more powerful, and they will not reach all, let's say, all customers. It will be the premium market, let's say.

[Daniel Thorsson, analyst]

I see. And then secondly, geographically, do you see any meaningful differences between the markets or countries that are good to be aware of in general?

[Johan Karlsson, executive]

I think there is not a big difference in general between the countries. We have easier in the SMB in the Benelux because we are so small, but that has nothing to do with the market. That's us basically. And I think on LCP, we have some differences between countries, but that is more on the general tender business from the public sector customers. So no major difference between the countries from a macro perspective.

[Daniel Thorsson, analyst]

I see. And then another question on the LCP new contracts here and the rollout. Can you share any thoughts on how it will look like in the coming quarters? Is it -- anything in this quarter we should be aware of kind of nonrecurring positive effects in terms of sales? Or is this a good level ahead?

[Johan Karlsson, executive]

It is. We are counting for quite some new tenders at the moment, and it will be a year where a lot of tenders change ownership, let's say. And -- but it's really hard to, let's say, evaluate the first quarter effect of that because -- most of the tenders include kind of a push in the beginning. So the first -- let's say, the first quarter can be quite big, and then it gets more normalized. So I think it will continue to be relatively, let's say, volatile between the quarters even though the long-term, let's say, rolling 12 months is a much more stable. But between the quarters, really hard to predict how much volume will go each [ tender ].

[Daniel Thorsson, analyst]

Okay. Yes, because that was basically my question that in the coming quarters, do you have any visibility on that you know that you will have a big rollout or the rollout has started in this quarter, will it last for next quarter? Or are your visibility also quite low?

[Johan Karlsson, executive]

Our visibility is low for sure, even in LCP, let's say. You could say that the visibility is about 4 to 5 weeks, which is the order lead time to China.

[Operator]

The next question comes from Jesper Stugemo from Handelsbanken.

[Jesper Stugemo, analyst]

Just a follow-up on the new framework agreements in the LCP. If you could give some more flavor there on the margin dilution here in the quarter? I was thinking, is this just an initial thing as we are starting to see the rollout here? Or is it more the contract per se that has this lower margin. I was thinking a little bit around your strategy and where you're prioritizing margin over sales growth. So if you could give some color on this?

[Johan Karlsson, executive]

Yes, a very good question. And I think it is -- if these contracts that can give us better margin than the previous ones over time. But as you know, the public contracts is always low margin in the beginning of the contract period, and that will usually have an effect with quite a large volume in the first quarter. And then the margin will gradually improve and the volumes will normalize, let's say, per quarter after that first push. We don't see any -- the contracts we were capturing at the moment, they have the potential to improve margins going forward. But the short term, they will affect it negatively.

[Jesper Stugemo, analyst]

And then on the PC refreshment cycle, if you could give us some comment on what discussions you're having with, for example, in -- from the LCP side here. Do you see that the customers are interested to start to upgrade their computers here in the -- during the fall? Or do you think it's more -- it will be more in the beginning of 2025? Or what's the conversations?

[Johan Karlsson, executive]

Yes. I think, in my opinion, at the moment with conversations with customers and looking at market, let's say, data is that we will see an increased activity during the fall. And it will come from, I think, on SMB, mainly macro is getting better and then launching of new products in the market. And on the LCP side, I think it will be mainly on the upgrade of Windows and the, let's say, new product launches because the new product launches will come to some of the employees of the, let's say, large corporate and public customers. But both of these will drive future demand.

[Jesper Stugemo, analyst]

And then just my last question on the cost optimization here and the FTE reduction. Is this mainly related to LCP and you will remain higher cost base in SMB? Or are you starting to looking over the SMB segment here as well?

[Julia Lagerqvist, executive]

It's not only related to LCPs, it's on both segments as a start. I mean, we look for cost optimization in all our segments. And as I said, we also want to keep this balance between having the right competence and the right resources when the market turns, which we believe is very hard to get that confidence back once the market has turned.

[Operator]

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

[Mikael Laséen, analyst]

Okay. I was just wondering if the campaign situation on clearance sales is continuing into Q4, how should we think about this?

[Johan Karlsson, executive]

I think there will be some clearance done in Q4 as well, but not of the same magnitude as in Q3. So it's really hard to say at the moment if it has any significant change or impact say on Q4. But there are some volumes going up also in Q4.

[Mikael Laséen, analyst]

Okay. Got it. And also, I'm curious about the EBITA margins or the gross margins on the take-back situation or take-back volumes? And if you can also comment on the EBITA margins for software and services?

[Johan Karlsson, executive]

Jesper, on take-back, I would say that we are -- I mean, we are -- we have, let's say, built the production capacity, which we're now filling with volumes. And volume is coming into the level of our current -- let's say we are slightly ahead of our own plans when it comes to taking in volumes. We are still not at full scale of production, for sure not. And therefore, margins are not where they are supposed to be long term, but they are contributing to the, let's say, EBITA result at the moment.

[Mikael Laséen, analyst]

Okay. And what type of -- you show the graph with volumes. Do you need 10% more? Or do you need a lot more to get...

[Johan Karlsson, executive]

You need -- I mean, to get to full scale, I think we can do that with maybe 20%, 25% more volumes. But as the volumes are increasing so rapidly, that can take maybe 2 or 3 quarters to get there. But the good thing now compared to a year ago is that we are at least result positive coming from take-back already today.

[Mikael Laséen, analyst]

Okay. What about software and services? When you grow that, how should we think about the mix effect that, that could have?

[Johan Karlsson, executive]

I think the software and services will contribute to the EBITA margin, and therefore, an increased share, they will improve EBITA margin. As we have said before, on the managed services side, we believe that the margin target is about double compared to hardware. So that will give you somewhere in the round of 10% segment margin. And that is probably a little bit lower when you look at other services than that, but it's still better than the hardware margin.

[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 tuning into the Dustin Q3 report, and we wish you all a very nice summer. Thank you very much. Bye.