Bechtle AG (BC8.DE) Earnings Call Transcript & Summary

Hello, ladies and gentlemen, and welcome to the analyst conference of Bechtle AG. I'm Martin Link. I'm Head of Investor Relations at Bechtle. And together with our CEO, Dr. Thomas Olemotz, I'm sitting here. It's almost sunny Friday afternoon. We'd like to share good figures for 2021 and an optimistic outlook on 2022, but actually a perfect setting one would think. But we all know that right now, we are suffering from a war in Europe. People, at the same time, are sitting in bunkers, are fleeing their countries. They are suffering, and they're dying. We all at Bechtle, and I think all of us, think this is unbelievable. At Bechtle, we have taken a clear position. We've published our point of view where we condemn the war. If you're interested, just check at bechtle.com. And our Board decided to give a donation in the amount of EUR 250,000 to UNICEF to at least remediate the suffering and the plight of children. With all the focus on the Bechtle AG figures, I think it's really very appropriate to mention these aspects. But again, the focus is different today. That is why I'm so happy to hand over to Dr. Thomas Olemotz.

Thank you, Mr. Link. Yes, ladies and gentlemen, indeed, it is hard during times like these to come back to our usual agenda. We will nevertheless try to do so for the next 30 minutes or so. It is my pleasure to welcome you to our analyst conference on the 2021 financial year of Bechtle AG, and I'm very happy to see that this meets with such great interest. Again, it's been a very eventful year, everything but business as usual, I think you'll all agree. A telling fact is that we are having a virtual meeting now for the third time in a row. Unfortunately, COVID-19 was and still is an issue even if it is, of course, overshadowed by the current difficult situation in Europe. We are certainly united by the hope that an in-person meeting can take place again in 2023 in a different and more peaceful environment. We are pleased to welcome our international investors again today. This call will be simultaneously interpreted into English. [Operator Instructions] Welcome, everybody. My presentation is divided into 4 major parts. As usual, we start by taking a look at the key financials of the 2021 financial year. Then the next chapter is share and dividend, where we'll be looking at the share price development over the past year and the payout -- the planned payout, I have to say, to our shareholders. The third chapter has the heading 2021 Highlights. It is concerned with the most important strategic and qualitative, but it's nonfinancial results that are essential for the future development of Bechtle. But since there were many of these highlights, we have to present you with a selection only. And we'll conclude with an outlook for the year 2022, the fundamentals and target at Bechtle. But first of all, our business development. We already communicated the key financials for 2021 in our preliminary announcement on February 11. And you're also aware that as of December 31, 2021, and that with today's reporting, we have changed the accounting method for the recognition of so-called standard software licenses. In our preliminary announcement, we provided a detailed explanation of the matter at hand. And in our annual report too, we addressed this topic in several places, but especially on Pages 169 following in a transparent and comprehensible manner as we usually do at Bechtle. For an overview of the topic, we would also refer you to our website, bechtle.com/ifrs15. When changing the accounting method, we decided to introduce an alternative or additional performance indicator, business volume. Business volume represents our revenues, including standard software revenues. That is gross revenues or in nontechnical terms, revenue according to the old logic. Business volume growth in the year under review was at 7.3%. That's fully in line with the expectations we had already formulated prior to the accounting method changes. Organically, we grew by 6.9%. When we look at the segments, however, we see clear differences. Consolidated growth was driven primarily by the IT e-commerce segment in 2021. There are 2 main reasons for this. On the one hand, this segment had recorded comparatively low prior year figure. On the other hand, when faced with supply bottlenecks, we were often able to offer customers alternative products. And after all, this business segment is usually about smaller units per order, which were more readily available. In the IT system house & managed services segment, delayed shipments had a particularly strong impact, especially in the context of large volume project business and framework agreements, which characterize this business segment. Let's take another look at the revised accounting method. In general, IFRS 15 regulates the recognition of revenue. Among other things, the decisive factor here is whether one act as a principal or to put it simply, by adding value or as an agent that is no added value during a business transaction. Until then, we had assumed, like all other software resellers, by the way, that in the standard software business, we were most of the time acting as a principal. However, as views differed, we filed a submission to the IFRS Interpretations Committee. Their opinion issued in December is not final, but nevertheless, clear for us. According to this new interpretation, we act as an agent in a large part of our business with standard software. This means that we no longer report all of these transactions as revenues, but only the margin generated by them. We are, after all, talking about a difference of EUR 940 million between the business volume and IFRS consolidated sales for 2021. This brings us to the development of sales according to IFRS 15. From now on, revenues at Bechtle are clearly defined as the value of our business volume excluding revenues from standard software. Normally, revenue development in terms of growth rates show similar values to business volume. However, in a year like 2021, with serious delivery problems for hardware, it is hardly surprising that the software business as a whole and especially for our Bechtle cloud has fared better than the hardware business. It is thus understandable that top line growth is somewhat lower than business volume growth, namely 5.1%. Apart from that, however, the same structural trends and developments can be recorded for revenues and for business volume. At this point, however, it is important to mention our order intake. In the year under review, it increased by 16%. This is the potential that Bechtle might have realized in a regular year. Here, you can clearly see how supply bottlenecks slowed down our business. And this brings us to revenue trends by region. In Germany, revenue growth was almost 3%. Similar to the segment view, we see that the system house segment was more severely affected by supply shortages because after all, the focus of our system house activities is in Germany. Top line growth of 9% in our foreign subsidiaries translated into a very gratifying performance, especially with a view to overall supply chain problems. It also exemplifies the fact that our business model is robust and healthy. Thanks to our broad positioning, we can balance out difficulties in individual regions or segments. And by the way, this was also one of the reasons why we decided to expand our M&A strategy in the year under review. As we've already communicated on several occasions, we are planning acquisitions in our system house segment even outside Germany, Switzerland and Austria. I'm sure that this year, we'll bring 1 or 2 press releases on this topic. Looking at the individual quarters of 2021, we see the seasonal development of revenues. In the first quarter, Bechtle recorded revenue growth of 10.3%, a strong start of the year. Supply bottlenecks did not yet play a major at least for Bechtle. We had already started to increase our inventories considerably at an early stage. This meant that we were able to ensure shipments longer than many of our competitors. Thereafter, growth figures continued to decline step by step as delivery problems persisted. But we're still within our forecast in the second and third quarters. But the fourth quarter was disappointing. It is only a small consolation that our business volume increased by 1.4% and thus did not show a decline. In this quarter, the supply chain problems intensified once again. In addition, there was restraint in the public sector due to the federal elections and the foreseeable change of government. And we shouldn't forget that we compared ourselves against very high benchmarks of the previous year or as a football coach might put it, we won the 2021 game during the first half. This brings us to the profit side. And we start, as usual, with a look at the gross margin. Up 7.4%, gross profit outperformed revenue growth. The gross margin of 17.3% is, therefore, above the previous year and also above the long-term average. Just to note here, the previous year's figure have, of course, been adjusted in line with the revised accounting method. Two factors in particular are noticeable here. On the one hand, cost of materials grew at a disproportionately low rate of 4.2%, one reason being supply shortages. Another, the increase we've seen in our share of services. Bechtle was particularly sought after as a partner for projects involving digital transformation. On the other hand, other operating expenses stayed on the same low level as in the previous years. So we still benefited from cost savings here, especially in car and travel costs. It remains to be seen to what extent we can maintain this level in a new hybrid world of work that we expect to emerge with the current year. And that brings us to EBIT trends. In the first 3 quarters developed -- EBIT developed at a high level in general. In Q1, we experienced negative one-off effects due to the setting aside of provisions, but that has not clouded the positive picture. In Q2, the write-back of impairments and smaller nonrecurring effects boosted growth. And in the third quarter too, we saw a positive one-off effect thanks to the aforementioned deconsolidation. In Q4, however, top line growth was too low for a positive bottom line trend. Let's now take a look at the development in the segments. EBIT development in 2021 in general was extremely positive overall and also largely balanced between the segments. EBIT in the IT system house & managed services segment increased by 18.3% in the year under review. The margin increased by as much as 100 basis points to 6.3%. In this segment, the higher-margin service share went up, thanks to the consistently high demand for services. We also saw, as I already mentioned, positive nonrecurring effects from the deconsolidation of the company. And finally, cost savings are also becoming more noticeable here. In the IT e-commerce segment, we were able to increase the margin to 5.9%. The background to this are price advantages that we were able to realize due to early stocking on the one hand and constantly high demand on the other. The overall EBIT margin is thus 6.1%. Our ambitious goal is to more or less maintain this value in the current year. To conclude our report on the key financials, we now come to the operating cash flow. Cash flow from operating activities was almost EUR 300 million in the year under review and thus, more or less maintained the high level of the previous year. On the one hand, the high inventory level had a negative impact. It is true that the available inventory to handle short-term orders declined. Having said that, inventories largely contained products tied up in projects that could not yet be delivered due to individual components of an overall order still missing. This stock has built up from quarter to quarter. On the other hand, the increase in trade payables had a relieving effect. Thanks to our very good, longstanding and cooperative relationships with our suppliers, we were able to extend our payment terms in some cases. Free cash flow even increased from EUR 204.1 million to more than EUR 218 million. And this brings us to a look at head count development. As of the 31st of December 2021, Bechtle had 12,880 employees and thus 5.7% or 700 people more than in the previous year. This head count increase is mainly accounted for by new hires. Bechtle continues to successfully position itself as a reliable and attractive employer. And this is the basic reason why we succeed in attracting new specialists year after year and thus ensure Bechtle's success for the future. We also have our employer brand to thank for, which we revised in the course of 2021. And the response in the HR market was very positive. And now this brings us, ladies and gentlemen, to the development of our share price. 2021 was a challenging stock market year. We all know that. It was difficult for all market players. In view of the overall difficult framework conditions, the markets were rather nervous and very volatile. And yet, at the end of the day, a positive trend prevailed. This development was also reflected in the Bechtle shares even though it was below the average's -- below average compared to the indices 2021 in total. You can see this on this chart here was truly volatile. Widespread [ funds ] were followed immediately by all-time highs. Our share reached annual an all-time high on November 9, with EUR 69.14. The development in the current year so far are anything but satisfactory. Against the backdrop of continued supply problems and the war against Ukraine, this doesn't come as a surprise. But we are confident that once the general situation improves, our share price will again see a powerful rise. And of course, in this context, we also have to look at the dividend. In our press release of this morning, you could already read the administration's proposals to the Annual General Meeting. EUR 0.55 dividend per no-par value share, a dividend increase of 22.2%. This is the 12th increase in a row. Once again, a clear indication of our reliable dividend policy and appropriate participation of our shareholders in the company's success. It is with good reasons that Bechtle is again and again mentioned as a high dividend yield. The payout ratio is just under 30%, slightly above the previous year's 29.4%. It is our dividend policy to always pay out roughly 1/3 of earnings after tax to our shareholders even and particularly in difficult times. Let us move on as usual to the so-called nonfinancials, special events in the past business year 2021. We have reported highlights throughout the past year. So we can focus today on a few relevant items, namely our M&A activities. We're going to look at training, sustainability, internationality and last but not least, a clear success in the field of our public sector segment. Let us start with the 2 acquisitions in the year under review. We have acquired a CAD/CAM/PLM specialist Cadmes, active in the Netherlands and Belgium. Founded in 1991, this reseller focuses on 3D CAD software by Dassault Systemes SOLIDWORKS. It has about 100 staff. In 2020, Cadmes reached revenues in the amount of roughly EUR 17 million. Bechtle already has 7 SOLIDWORKS companies in Germany, Austria and Switzerland. With Cadmes, we are now expanding our CAD/CAM business visibly to Benelux. And the second acquisition was made in Austria. Bechtle IT system house Austria acquired the IT service provider Open Networks located in Vienna. This further strengthens Bechtle's competitive standing as IT solution provider and service provider in the Austrian market. Open Networks is a specialist in the realization of IT infrastructure solutions as well as application services, data center, security and network services. Founded in 2008, the company has about 25 employees and expects 2021 revenues of roughly EUR 13 million. The next highlight refers to one of the topics most relevant for our future, namely training. As of December 1, 244 new apprentices and dual students started their career in Bechtle. The number of new hires thus reaches a record level. Altogether throughout the group, we are training 691 juniors in different technical and commercial trades. 609 out of the 691 apprentices and students, the vast majority are located in the German Bechtle sites. The current training ratio in Germany amounts to 6.9%, a good value indeed. But by 2030, we want to see that figure rise to 10%. That takes us to the next future relevant topic, sustainability. In September, Bechtle AG published its Sustainability Strategy 2030. Bechtle again taking a systematic approach to sustainability as early as 2011 and has been publishing all relevant activities in an annual sustainability report for 6 years now. The newly published Bechtle Sustainability Strategy builds on the organization's achievements while adding new and ambitious plans for the future. And it's part of 4 strategic areas of action: ethical business practices, people, the environment and digital future, each with 3 focal points and strategic goals attached. For progress to be consistently tracked and measures to be adjusted as and when this becomes necessary, Bechtle has defined milestones and operative actions. List of aspirations includes Bechtle's objectives to become carbon neutral in areas it can influence by 2030. And yet another important topic also in the context of our expanded M&A strategy is the continuous internationalization of our company. GITA, the Global IT Alliance, initiated by Bechtle AG in 2013 is now expanding its partner network by 3 new partners. In India, this is Dynacons Systems & Solutions. The company has been an active player in the Indian market for 25 years and now represents a pin on GITA's global map. GITA is now able to cater to customers in this fast-growing market through a very experienced partner. And with our new partner Compugen in Canada, we cover the entire North American market. And not only of interest as a holiday destination, our partner in the Caribbean, Inova Solutions. Just to remind you, our Global IT Alliance, GITA, is a global alliance of carefully validated IT companies, united by their shared goal of offering customers consistent and exceptional service quality in their cross-border projects. And the clear focus here is the infrastructure business. And finally, a success story from our public sector segment. Dataport awarded Bechtle IT system house Hamburg, the framework agreement, delivery of hardware for IT workplace equipment and services as of January 1, 2023. Now this agreement, Dataport will procure in the following 4 years until the end of 2026, standardized hardware and accompanying services for its own organization and Dataport customers. The scope essentially covers PCs, notebooks, thin clients and monitors for roughly 100,000 workplaces. The total volume for the term is roughly EUR 220 million. Let us move on to an item that has been newly added to our presentation, namely an outlook on the development of the IT markets and individual trends within our sector. Yet making reliable predictions has certainly been as difficult as it is right now, the war in Ukraine, in particular, has created great uncertainty with regard to the economic development. Moreover, the IT market is still suffering from various supply chain problems. But of course, there are also positive indicators for the development of business year 2022. Let us start by looking at these. The average growth rate for the German IT market from 2019 to 2022 is at a good 4.5%. For 2022, the industry association Bitkom forecasts an increase of 5.9%, at least that's the current figure. For IT security, Bitkom forecasts even higher average growth, nearly 9.5%. Bechtle is extremely well positioned in this field. Throughout the group, we have more than 300 security experts working for us. This is one of the biggest expert communities in the whole of Europe. For the cloud market, Gartner expects global growth rates of just under 20%. Here again, thanks to partnerships with Microsoft, Amazon Web Service and Google, but also through consistent and continuous training of our own staff, Bechtle is extremely well positioned to realize the resulting potential. On the other hand, we're also confronted with several challenges in 2022, and we mustn't underestimate these challenges. The longer the outrageous war in Ukraine continues, the more likely severe implications for the economy at large will become. Over the last few days, several experts have lowered the growth forecast, in particular also for the German GDP. But even without the war, we are still fighting against supply bottlenecks in the IT market, and that will keep us busy for part of the year. The course of 2022 business year will depend, amongst other things, on whether the continuously high demand for IT solutions can actually be met. How may Bechtle be affected by these contrary framework conditions? Well, let us proceed to the outlook, ladies and gentlemen. Our optimistic forecast, which might take some of you by surprise, is based on certain assumptions, the likelihood of which, however, remains uncertain. Assuming, however, that these assumptions will come true, we are quite confident for 2022. And more specifically, we want to increase revenue considerably once again, and the same goes for our pretax profit. EBIT margin is to be on par with previous year. Against the backdrop of the current challenges, these objectives might seem very ambitious indeed in view of our outstanding market and competitive positions and the high demand for IT infrastructure, software and service solutions. Nevertheless, these are realistic objectives. Ladies and gentlemen, so much on the 2021 business year and the first outlook on 2022. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]