Dicker Data Limited (DDR) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Dicker Data Limited Full Year 2022 Results Update. [Operator Instructions]. I would now like to hand the conference over to David Dicker, Chairman and CEO. Please go ahead.

My name is Dave Dicker, I'm the founder CEO and Chairman of Dicker Data, and we're going to give our results for the last financial year to date. Before I hand over to Mary, I'd just make a few comments on the results and on the overall situation because we didn't get being completely honest, we didn't get quite the result we would have liked to have got but we were affected by forces that are completely out of our control and for which we actually don't get a remedy. I'm talking about inflation to some extent, but principally interest rates because we don't control the interest rates. No company controls the interest rates. And if the interest rates go up, conceptually, your results are going to go down to some extent, and it's impossible -- you might say, well, let's make some changes in other areas, but the issue with that is that those changes are not actually linked to the interest rates. We haven't got any coupling with interest rates, and there's nothing we can act in that regard that we couldn't do regardless. So, it's a situation where all companies are basically affected and that's the way it goes. In fact, they all saying rising tide lips boats. Well, when the tide goes out, all the bots end up on the moat. And that's just that's the way it is. It doesn't mean that we can't get good results. And I still feel that last year's was pretty good, all things considered. And we're certainly full speed ahead for this year, but sometimes things aren't exactly the way you'd want them, and we've been in this business for a long time and sometimes you just got to ride the ups and downs. Details on the results, I'll hand over to our CFO, Mary, who will give you all the numbers, and then gladly she will give you an update of the overall position and the market position. Thanks very much. Over to you, Mary.

Thanks, David, and thank you, everyone, for joining us on this call. We're pleased to be presenting our results for the FY '22 year. And sort of to reiterate what David said, it was a bit of a challenging year with a number of initiatives and plus the wider macroeconomic environment. So, what I'm referring to as a business, we undertook a couple of acquisitions, 2021 and '22 and a lot of work was put in place in FY '22 to actually integrate and consolidate and start working towards delivering the synergies that we expect from this business to actually and consolidated gearing better working towards delivery -- Sorry, guys, there's a back -- I can hear here back -- So apologies for that, everyone. Where we ended up for the year, it was $3.1 billion revenue, an increase of 25%. Strong EBITDA number as well, all things considered, it was also an increase of 9.4%. It was pleasing to see our recurring revenue increase to $743.9 million, an increase of 42.5%, and where we were impacted was the delivery of net profit after tax, which was down 0.7%, relatively flat on last year. And in the circumstances of one-off expenses, an inflationary environment, and rising interest rates. We feel that was a solid result taking into account those elements. If we have a look at the financial trends, the delivery of the gross profit margin was in line with how we expected it. And you can see that normalizing from the FY '20 and FY '21 year, where we had unique circumstances around demand, allowing additional delivery of margins. But where we delivered in FY '22 is in line with expectations. Continuing growth trajectories for both revenue and EBITDA, where we were delivering in '19 and '18, more so in '19. And that's taking into account that we located expenses in FY '22 as we worked through our integration. Looking at the FY '22 consolidated group results, operating costs, excluding one-off costs, increased by 32.4%, which is impacting the delivery of the operating profit before tax. This was predominantly around increases in salary and headcount costs. With the 2 acquisitions of Exeed and Hills, we added over close to 250 people in terms of our headcount numbers. And in terms of looking at how retaining the resources in an environment in terms of the market around labor constraints and requirement for people to keep delivering on the revenue growth that we were heading towards. We saw that cost increase close to 29%. Again, as the company continues to grow, we should see an improvement in leverage from our cost line. And also as we synergize the operating costs from both Exeed and Hills acquisition. Included in the operating cost number is also about $4.5 million in amortization of customer contracts, ending up with operating profit before tax posting a slight increase on the prior year. If we break that down a bit further, if we look at country by country, which is probably more relevant in terms of trying to understand the dynamics of where we are working to in terms of profitability. Australia delivered a very solid result. This is in the context of the Australian business being a very mature business, with a lot of established strong relationships with vendors and in segments of the market that we participate in and even bringing in the DAS business relative to the underlying business, it's a much smaller pie. And whilst it didn't necessarily deliver in terms of profitability metrics, is there a strategy in terms of increasing our market share in a different segment of the market? So, for Australia, revenue grew over 18%. Gross profit margins actually increased and this is a testament to the type of segments we are now participating in the DAS business, AB, and some other improvements in margin with the different categories of business that Vlad will be able to elaborate on in the business update. As David said at the start of the call, the biggest impact in terms of profitability was the increase in interest costs. We do fund our working capital via debt facilities. It's sort of been the core way that we have managed the business. Whilst we did forecast for some interest rate increases, I think the speed at which the rates were increasing month in, and month out was probably the part that was more unpredictable than the concept that there was going to be rate rises. But even having said that, the Australian business still delivered a net profit after tax number increase on the prior year of an increase of 3.3%. If we look at the New Zealand business, the significant revenue growth was delivered with the integration of the Exeed business, giving us access to a whole division of market we didn't participate in before being consumer retail and being a larger proportion of our overall New Zealand business, the impact on margins was quite evident as that business tends to operate in a lower margin environment. It's still a profitable business, but not quite the metrics in terms of how we generally are looking to deliver and the size relative to the commercial business, impacting overall average margins. The strategy is still -- we feel is still correct. We're looking to grow our commercial business and having access to new vendors that we acquired with that acquisition, particularly the HP relationship being one of the larger vendors in the New Zealand market and starting to now work on some more synergies across the Australian vendor portfolio to be able to grow our commercial business and start increasing the delivery on margins in that business. New Zealand also, we had over $2 million -- around $2 million of amortization of intangibles. I'll just point out that these numbers are in NZD and slightly varied to the AUG conversion of the New Zealand business, but it still gives a good concept of where we see in the New Zealand market. So, there's a bit of work to be done in FY '23. We acknowledge that around the New Zealand business, and that's going to be our key focus because we still see it as a major opportunity in terms of bringing up the profitability metrics to the Australian business. Turning our view to the balance sheet. The FY '20 was challenging from a working capital investment perspective. The acquisition of Exeed and Hills were predominantly hardware vendors, which meant additional investments in inventory. There was also a period of supply chain disruption, which don't give us a lot of predictability on deliveries and we couldn't rely on vendor EPAs. So there was -- our teams responded in a way that you would expect around ensuring we had sufficient inventory to meet the channel needs by carrying higher levels. And we saw our inventory investment increase by about $60 million. Even more so, we saw an increase in our receivables book as we supported credit in the channel. This is our one of our core competencies or core expectations of distribution is to support trade credit within the channel and the type of customers and that came with the acquisitions changed slightly the profile of our customer mix, meaning that we've got extended days, whether they were the existing terms that operated with the -- from the Exeed and Hills businesses, plus there was a request from customers on extended terms, particularly where there was supply chain disruption and we couldn't complete orders in their entirety. So, that meant that our overall working capital dollars have increased significantly. This was funded by a combination of an increase in debt levels. And then we did do a capital raise, which predominantly was for the building of our new warehouse. But in the first instance, we applied it against our debt levels and have drawn on it throughout the year to fund part of the working capital requirements. From a debt-to-equity scenario, the leverage has been maintained relatively. But with the increase in interest rates, we've seen the debt service cover ratio come off from where we were at 21%. But definitely all well within any kind of covenants that we need to cover. From a cash flow perspective, just as I've said earlier, predominantly has gone into increases in working capital. Even the acquisition of Hills was predominantly inventory. So, the combination of the 2 represents the increase in our working capital investments. The company has had a strong dividend policy in terms of paying quarterly dividends, and this wasn't any different for FY '22. The only caveat or the variation is that we try to smooth out the dividends and we're a lot more optimistic on what we thought the final net profit after tax number is likely to be. So, the interim dividends were set higher than they probably should have been resulting in a lower final dividend, but comparatively was, in total, the same similar number -- similar dividend cents per share being paid in for the FY '22 year as we did in FY '21. It's been -- the dividend policy has sort of been an underlying feature of the company. And we don't see that changing. I know there's different views in respect of that. And we are looking to maintain the 100% dividend policy and still pay the interim dividends, but we will have to rethink the dividend per share per each quarter. If we look at sort of what's next in terms of the business, I just want to give you an update on the warehouse extension. We completed our current facility in '21. We felt that we would have that space for a period of time. But with the growth experienced in the revenue number, it was quite evident that we had to press the button on the extension piece. So, we commenced the second stage of the warehouse build late last year. And that will provide a further almost 17,000 square meters in warehouse space. It's currently on track to be completed in the first half of this year. Hopefully, we'll be in a position where we might even be able to be in June, July of this year because we are running out of space as we have closed the Hills warehouse and moved a lot of the Hill's inventory at our Parnell location. The cost of construction is estimated to be about that $15 million mark, $12 million for the build, and $3 million for estimated fit-out. And currently, it's tracking on time and on budget. Now, Vlad will give you a more detailed update on the Hill's strategy and the access and surveillance market, but just wanted to give you an update in terms of where we landed. We paid 21.7 million for Hills, of which predominantly close to $20 million of it was inventory. And we inherited a number of branch sites, which added costs that weren't in our forecasting and the work that's been put in place put in place over FY '22 with to refit some of those branches. There's been investments made in the look and feel and setting up the business to start delivering the profitability metrics in the FY '23 year. So, there was costs incurred that were also duplicated as a result of running the extra warehouse whilst we were looking to integrate this business. And that work has now been done, and the branches have -- we've reduced some of those branch costs by exiting some of those sites and resigning new leases for new sites that are more suitable for the operations and also sets us up for having the right sort of strategy around the DAS business. That's the update from myself. I will hand it over to Vlad now to provide the business update.

Excellent. Thank you, Mary. So, good morning, everyone, and thank you, David, for the opening. I just wanted to start with that last year was a very challenging year, a very emotional year. There were a lot of things that came into last year. This was very unpredictable, but also a lot of really, really good things happened last year. It was incredibly successful for us. We've executed a number of very, very important strategies. And I think last year, I would probably summarize as -- we're getting out of that unpredictability we're setting ourselves and putting ourselves in a fantastic position to take advantage of all that hard work that the company and organization put last year. So, looking at some of those market challenges, I think they were not dissimilar to the year before, but started to change a little bit. Obviously, as the supply chain started to normalize, we would start taking some of the inventory lines in place because the unpredictability of ETAs and deliveries were still very much there. And therefore, it starts tightening some of our working capital. The ETAs and supply chain is starting to show some real clear sign of improvement. In fact, I'm very certain I have a very good feeling that by end of this year, we will get back into complete normality because I could see that supply is getting better. Factories are getting built. They produce more. Demand is getting slightly adjusted into the certain areas. So supply is catching up. So that's going to actually work really well, and we're going slow business as usual in 2023. Exactly the same situation, the ship shortages, which kind of one result one in the other and logistic constraints as well. Everything was as a consequence of things that's been happening last year, which it was incredibly hard to predict. When we worked from '21 into '22, obviously, '21 was a really strong year for us, with close to 30% growth in top line and bottom line, give us a good headwind. Going in 2023, we didn't forecast Sonic. We're starting in Ukraine in Europe, which, in effect, influences the energy prices, the inflation rates, which our business is incredibly dependent on, I mean, we are ultimately a distributor and a logistics company, the energy cost and freight charges and all that sort of some incredibly relevant to us. We have to go through acquisitions and a normalized operational status of acquisition of 2 companies. We welcomed 300 new employees into the business and the back of exceeds and Hill distribution. So, there was a lot of things to go through, and I'm really, really happy with the way we've handled it, the way we showed resilience and still deliver to various #2. That's a market challenge. Let's go to the next slide, what's called IT and market and strategies. So, I wanted to show you our market share and how we're actually doing there's ultimately certain things we can't control anything we can't control. We can't control macroeconomic influences environment. But what we can control is how well we go against our competitors. How is the market sees us from our immediate market. Our reseller partners, our suppliers, our vendors, how do we perform? And I'm so happy to report that we did really well. If you look at the Australian market, I have removed consumer part of the pie because, I mean, we have in Australia, a very, very tiny small consumer division. But in order to make the comparison fairer, I think if we just look at the corporate commercial enterprise business only because that's what 98% of Dicadara's Australian business coming from. We see it at 35%, which is doubled SMIC, doubled Ingram. In fact, if you put both SMIC and Ingram together, we're still a larger and much stronger distributor. So, we've established ourselves as a strong, strong player in this environment. If we look further and segment the business and we look at what we call a mid-market and market segments. We hold even more market share. There won't be a vendor where we hold less than 40% to 45% market share. So, from this perspective, we continue to service our partners exceptionally well. We continue to grow revenue. We're walking into the new market segments. We're opening up new opportunities. So, from our vendor point of view, our market share is growing from a partner's point of view, our partners are spending more with us than with our competitors. So, that bid is working really well. If we look at the New Zealand market, I've left consumer and retail piece in there, because, obviously, our New Zealand business have a large portion with acquisition of XP, a large portion of our consumer business and also weak appearing basically the entire distribution available market. We are putting ourselves in a very strong #2 position with 29% market share. Again, even within a very, very challenging and tough operationally integration in New Zealand, we've managed to grow our top line substantially. So, if 1 plus 1 did not equal 2, it's actually equal 2.5%, which is really, really good. Some of the areas that we wanted to grow and go a little bit harder in New Zealand didn't happen. Some of the operational leverages and some cost base of New Zealand people. We've been very cautious with. I think now as all operations are done, we've moved the warehouse, we moved the office, we've established our partner base. We've completely structured our business in New Zealand. I think now, this is the time where we go deeper and fighting those operational leverages and driving that net profit margin opportunity in New Zealand. But in terms of our market share with the leading vendors like HP, Deltek, Microsoft, Apple, and a few others, we saw it. Very, very strong and performing really good as well. So again, that's why we call out in New Zealand as perhaps one of -- look, I'm going to name names in New Zealand was probably one of the biggest challenges in 2022. It will result in being the biggest opportunity for us in 2023. That's how we see it internally within our business and where you can obviously sense thing where a lot of focus and a lot of energy is going to go in 2023. If we go to the next slide, this is just demonstrating a number of portfolios. A lot of investors would ask me a lot, what's the right number of vendors. I don't think there is a clear answer here. It's all about, are we delivering the right value to these vendors. Are we doing what those vendors want us to do in this particular region? And vice versa, are they relevant to us? Are they a strategic vendor? Are they complementary vendor? What sort of return on investment this vendor brings into the Dicker Data? So again, maybe 10, 15 years ago, we didn't have this luxury. Now we can actually assess the relevancy of the partnership. How is that going to change within 5 years and 10 years, what's the long-term real, so this year, we've started this process and -- sorry, last year in '22, we started this process. We're going to continue with this process in '23 of actually assessing a lot of vendor relevances, which are the gaps we have, what other new vendors we need to bring in? And maybe perhaps what the vendors in our portfolio don't make a lot of sense. So we're starting that process already. Again, it was a very challenging year, and yet, it's just again the testament of the success that we and organization keep achieving. You look at the various industry recognition trophies that we received. Again, there was an Australian business and New Zealand business. APG recognition, Dell Technology, one of our fastest-growing vendor and probably still has one of the biggest growth opportunities awarded as to the distributor of the year at the APJ level. Similar thing we've had with Lenovo, a similar thing with Juniper Networks, and so forth. We've had a couple of really good software vendor recognitions. We've had very tough after awarding us with the best distributor of the region, which is APG region, then the next thing it led into them pointing out as their exclusive distributor in this region, which is fantastic. So, we have won our diversity and inclusion champions at Victor ceremony aroused by ARN. On the 10th year in a row, we've become a handy distributor of the year and we've become a software distributor in New Zealand. I think it's phenomenal. I just show you the culture that we have, the quality of people that we have, and level of success and resilience that these people is driving, which just makes us all incredibly proud. So next slide, we go into the 2022 vendor additions. Obviously, we've got a lot of new events came from acquisition of the Exeed business and Hills business. But also we've been working aiding organically a lot of new vendors. So, Philips came on board to add to our AV strategy. Cloudflare came on board to add our cybersecurity presence in the market. By the way, [ Clasi ] came as an exclusive vendor as well. There was a very significant win by our software team. We have eaten power distribution vendor came in. What got -- sorry, and if you are the new vendors, the chain on board. That has now become a function of day-to-day thing of myself and my executive team, leadership team, we have seen the new vendors, we assess the new technologies. We're looking at what our market requires and we're bringing these vendors on board. And that work will continue to happen. If we look at the next slide, Slide #18, as a long-term vendor relationship and diversification. Again, a great picture, a great testimony of our well-executed plan. It's always a balance between a volume and value business. We are a hybrid business. We drive both really successfully well. When it comes to the top 5 vendors, which is the biggest probably top 5 vendors in the world, when it comes to the channel and distribution, Microsoft, Cisco, Dell Technology, Lenovo, Hewlett Packard Enterprise. I wanted to make sure that when my reseller partner and one of my 10,000 partners contact and to get serviced by Dicker Data, they get exactly the same service level as they would deal with the vendor itself. And for that, I need to build a very competent skillful, and very strong culturally business units within the organization. That top 5, representing about 50% of the business is exactly what we want to achieve. And that's what exactly we've been achieving, especially in the last 3 years. Also then, we need to make sure that the vendor diversification is very strong. So, we don't want a particular one vendor to hold a big portion. That's more of a risk mitigation strategy. So our top vendor, ANZ, which is Microsoft, is hold just over 11% of the overall share within Dicker Data/AMZ. If you look at the independent territories, Australia and New Zealand, again, it will be a very similar kind of percentage. So in Australia, [ isca ] is still the largest vendor, but in New Zealand is actually -- is the large vendor. But overall, in ANZ, it's actually Microsoft who is holding the top position. Saying all that, I think we achieved a nice good balance between the minutes and we're continually driving that vendor diversification as strategy. Next slide, if we go to the revenue category. So where is our growth came from? $3.1 billion. First of all, what a magnificent milestone for the organization get over $3 billion. We've had 36.7% growth in our software business. We've had over 3% growth in our hardware business. And interestingly enough, both acquisitions with a Hills security distribution and Exeed Group predominantly brought a lot of hardware vendors on both. So, we had a full year realization of ice business in New Zealand, and we've had a 7 months, I believe, 6 to 7 months realization of the hardware business. So, good growth in Bisset software is doing exceptionally well, recurring revenue grown 42.5%. It's now $745 million. We're trying to get to $1 billion mark over in the next 18 months, I think it's going to happen. We have some exciting new programs that we're driving. The existing new vendors -- existing and new vendors, bringing a lot more subscription type of revenue, product sets, and opportunities to us. So, I think the software is going to be a big dominant growth in 2023 as well. If I look at the hardware pie on the left, every single category has grown. The least drive was coming from PCs. We've called it out in the beginning. We've called it out that the PC is starting to get softer, it's flatlining. A lot of industry experts were saying that the software will be declining. Some of the industry research and Analysis was saying that PCs will be declining up to 20% year-on-year. Obviously, we haven't seen in our business. We still delivered a slight growth. I do believe the tendency of that flat line in PC business is going to continue in 2023. But looking back at January and February pretty much is over. And I'm looking at my open orders and the activity levels and open quotes. This is commercial and nice-priced are still very, very, very solid. So absolutely, now I have full confidence in that line is going to continue to do either flatlining or maybe a slight increase in 2023. The networking started to do better. We started to get a little bit better stock in. We started to ship some of our backlog that we brought in from the beginning of 2022. Serving storage component, data center infrastructure went into the growth. If you believe last year, it was a decline. Again, we're having that mid-market and SMB started to get a little bit more livelier and doing more projects in. I feel this year, we're probably going to start seeing some bigger projects dropping between 2020 and 2021, and even the majority of 2022, we a lot of larger-scale projects were kind of frozen. We definitely see a lot of opportunities, and we're quoting on a lot more opportunities right now. In fact, if I have a quick mention about our open orders and our open quoting, currently, whether it's hardware or software, we're experiencing 30% increase in our quoting activity. So as you can see, there is absolutely not a slowdown in the way we're going to the market and quote. If I look at our open orders, it's holding just under $300 million. So, it's back from under $400 million. So you could see that the supply chain is getting better, but it's no way near my $150 million that it's supposed to be. So, we still probably have double amount of backlog that we need to ship. And by the way, as the supply chain going to improve, this $150 million will be invoiced and shipped on top of all the regular business activities. So, that probably will give us a slight upside this year as I start seeing it improving. But look, looking at all the other categories as well, consumer peripherals, obviously, exceed and Apple type of business coming in, a huge increase there. AUCs continued to grow, and we continue seeing a good upside there. So, I'm quite enthusiastic, given all the macroeconomic circumstances, given all the unpredictability last year, we've learned, we understood and then going in 2023, we're a lot better equipped. We now -- we're putting ourselves in a more predictable type of environment. We've budgeted a lot of things. We know that will be probably a couple of more interest rate rises. So, everything is in the budget now. Okay. Going into opportunities. I think I've touched based on some of the key opportunities. But again, cybersecurity, a big, big, big tuck-in opportunity growth. We're going to go after this very aggressively, both Australia and New Zealand. Software, you've seen 30% growth. We're expecting another very, very strong growth this year. Anything to do with hybrid IT and multi-cloud is a big incentive for us to go up this business. Look, you can read it for yourself. Everything here represents a good opportunity. And I always say within my experience, my personal experience, my -- I mean, over 20 years being in this industry, I know that tech is always finds the way to benefit whether the market conditions are good or bad. The market conditions are bad and businesses looking hard to make themselves more resilient, stronger, more efficient, and effective, the first thing that comes to their mind is how I can digitize, how I can make my business more effective operationally, how I can bring more smart into the business so that I can survive. And in that sense, everybody will start looking at how they can bring more solutions and technology. If the things -- if the macro environment is very strong and good and positive then people would think, what's the next thing for me? How do I go even further in driving my multi-cloud hybrid IT strategies? How do I prepare myself for those tough times to come later. So, in either way, we find a good opportunity to find our customer. And obviously, you could see, even if you look at the last 15 years of Dicker data's performance and growth, you could find we did exceptionally well in the best times and in the worst times in unpredictable times. So, last year was very heavy in terms of so many things happen at once. BCA going to go more in business as usual and take advantage of all that hard work that we've done last year. That's how we position ourselves. Now, where is that growth is going to come up? I mean, I've mentioned New Zealand many times already. I think David mentioned it and Mary mentioned that New Zealand is a big opportunity for us. Over $600 million business, very strong market share. We still have some really good opportunities to bring more new vendors on board. But obviously, it's not a secret. The obvious opportunity for us is to get and bring our net profit margins in line with an Australian business. That, to me, is the biggest opportunity this business has right now from 2023. The second biggest opportunity is obviously our top business. We're thinking of doubling our business this year. In this business, we've put so much hard work into all the branches' reserves, business is coming in. Nevens is being established. We have just -- we've had the gap in New Zealand with DAS. Now we have made a small acquisition of a connected of CSP business, a connected security products business that's going to give us the footprint of fantastic customer base and product sets in New Zealand, which result also in some upside in Australia. So, we're lining that business really within opportunity of that as well. So, DAS business, both New Zealand and Australia is a great opportunity. And why we're highlighting it as an opportunity? I just want you to remember, does business operates and at least the double margins that IT business operates. In some instances, 3x. So, for us, if we go from a $75 million business to $150 million business and then a year after in the $250 million business at margins of 20% plus in some instance is 25% plus, you can do the math. It's a very, very attractive and very good business for us to focus on. And so far, what I've seen in the last 6 months, it's just going from center strength. Another 2 points is the type of security. I think I've mentioned to you before, I've been focusing on this area. I mean, I look at our own business, lots of things we did with our own business Dicker Data last year is actually improving our cybersecurity internally, putting the double and triple multifunction multi-facetication systems in place, increasing our security dropping our vulnerability. We've been tested by some of the industry-leading security analyses internally as Dicker Data of how we position we position ourselves incredibly well against the threats and so forth. So, it's something that all organizations, big or small, is going through that now. And that is becoming very, very sure with so many different players. So, we as a distributor, we bring the best of abilities, best of the cybersecurity vendor portfolios, we pack them in the solutions, and we're making sure that our customers know about it. And the market convergence, of course, it's -- we believe in this. We're seeing it working, look at the professional AV market, look at the electrical market, operational technologies market. If you look at the top 10 customers who are buying those products now, it's all IT customers and IT integrators, exactly the same thing is going to happen with the physical security in the DAS business. So again, a big, big opportunity for us to open up a brand-new market, brand-new segments like that does the acquisition of Heels gave us 3,000 new partners. And interesting stats in the last 6 months, over 600 of our traditional IT resellers we're buying DAS products, providing products from the Hill distribution. So again, you could see Hital playing out. All right. I think my section is done, and now I believe the other question time.

[Operator Instructions] The first question today comes from Bob Chen from JPMorgan.

Just a few questions for me. I mean, firstly, just on working capital. Obviously, you saw a bit of pressure on that over FY '22. Can you talk a little bit about how you're thinking about this going forward? I mean, it looks like most of the cap rates has been reinvested now. Do you expect to see some of this unwinding this year?

Bob, yes. I'll take.

Okay. I'll do it quickly, I'll take my view and then Mary can add as well. Bob, yes, absolutely, 100%. And we're already starting to show good signs of reduction. As soon as we will start to see and get confidence in ETAs and deliveries, it will naturally going to come down. It's a very simple mathematical equation. Our vendors give us targets. They want us to hit today's targets. We wanted to make sure that we don't miss an opportunity. But on the other hand, we wanted to make sure that we have the right inventory in stock. Our biggest challenge with hitting the targets and getting the right inventory was inability to do that last year. This is as simple as that. You need to buy $10 million in order to receive a couple of percent rebates. We have to buy $10 million. We cannot buy what we want to buy. We can only buy what vendors have available for us to buy. When you're in this environment, it's naturally when you warehouse builds up with stock, that it's then getting harder to sell. Now, we're moving more and more into environment where we can get anything we want with PC then this is done. So now, we're going into the mode of how do we reduce the clients, as we brought 6 months ago. That's why if you look at the aging inventory, is also quite high. The great thing is all our vendors working with us. They're giving us money in order to liquidate it. We've just chosen not to go too aggressive because obviously, we're trying to maximize our margins. But ultimately, it's the function of the business, how aggressively we want to guide in liquidating, and the tough side. To answer your question, the further we go through this year, the more confidence we're going to gain in supply and ETAs, the inventory level is going to come down. The cash will free up. And I do believe that starting somewhere around July, or August this year, we're going to go in more of a normalized business-as-usual environment. We're bringing our inventory down to the normal sort of 4 to 5 weeks, weeks and visitor levels, and so forth.

Yes. And just in terms of the receivables piece, because we couldn't complete orders in their entirety, we also found the day sales outstanding increasing with customers taking a lot longer to pay or where they couldn't complete their own orders, requesting extended terms. And the type of customers we onboarded with the Hill's business, there was established practices of longer terms, and we're starting to bring some of those back as well. So, I think from a receivables perspective, some of it is going to be slightly more days, and part of it was contributed by the fact that orders weren't completed in total and customers were holding off paying, which really pushed out those days and the increase in receivables investments.

Okay. Great. And then just on the comments earlier around the equating activity, a 30% increase. Can you just sort of clarify, is that sort of 30% increase on sort of normal levels or a more normalized level that you're expecting?

Yes, 30% increase on normalized levels. So well, it's actually 30% increase on '22 levels. So, when I looked at about a week ago, I've done a comparison of open quotes that we've done in January 2023 versus January 2022. It's about 30% increase in equating open quotes right now.

Okay. Great. And like how should we think about how that sort of flows into sort of the revenue mix this year or the revenue build for the --

Yes, obviously, look, the top line has increased, right? I mean, we've grown at 25%. So you kind of expect the quoting activities increase as well. But this is more to demonstrate that a lot of people find this market of and a lot of people find very challenging and how is it going to affect us as an organization. So when I look at those metrics as open-coding activities, it just gives me the good sense and then I'll go and slice it further and segment it further as well through software, hardware, different areas, cybersecurity, Microsoft. And I could clearly see where there is activity is happening. What's the market -- what is driving that demand and increase in quoting activities? And to me, right now, as we speak, I don't see any signs of reduced quoting activities and normal demand into the business. Obviously, gives me a good confidence level going into 2023.

Okay. Great. And then just the final one on DAS. You sort of given some color on the gross margin expectation. But just on the PBT margin for that business, like how does that compare to your core business?

Exactly the same. It's the double gross profit margin, and we would eventually expect a double NPBT. Again, NPBT may take a little bit longer because there was a lot of investments done and still very heavily operated business. But we are rationalizing a lot of things. We're finding the way to operationally find a lot of efficiencies in our internal freight, external freight, and servicing the partners. So, yes, I think it will definitely drive a larger NPBT compared to the normalized IT business.

The next question comes from Chris Gawler from Goldman Sachs.

I just want to ask, firstly, just on early payment discounts. I mean you made a comment that you sort of missed out on some of that in 2022. I mean how much are you sort of missing out on at the moment versus typically due to working capital? And do you mind just outlining the financial impact of that?

So yes, for sure, there's a couple of vendors where the settlement discounts can be quite lucrative. And you've seen the vicinity of a couple of million dollars that we missed out in FY '22. The opportunity is predominantly with HP and LG, and we have to make strategic decisions around utilizing that capital, which were in previous years, we have fully utilized settling HP on effectively COD for a settlement discount that's around 1.5%. So, we did take advantage of it during FY '22 at various points. It's just not to the full potential that we could have.

And so do you expect this year as working capital online that you'll be able to take full advantage of that again?

That's the plan, yes.

Yes. Okay. And then maybe just on the gross margin dynamic. I mean, conscious, there's quite a few competing factors at the moment. You've got mix between software and hardware within hardware, you've got obviously DAS growing in different factors as well with PCs, maybe a bit softer. Do you want to sort of giving us your thoughts on where you see gross margins heading into '23, maybe versus '22?

I think we've always been guiding the market on our gross margins at about 9%. And I think we've delivered that on our guidance because that's kind of within our control. We know how to control it. We could either go a little bit more aggressive on top line and probably get lower gross margins. Well, actually talking about the high inventory, we probably could have gone a little bit more aggressive margin liquidating some inventory but then it would be to the expense of the gross margin, gross profit margin percentage, which we've chosen not to because we knew that our vendors, the thing is, we know that our vendors is supporting us. And we know that the money is coming. It's maybe not coming as fast as we wanted to come, but it is coming. So, that's why we kind of balance that approach last year. We're probably going to go in a little bit more aggressive sort of inventory reduction strategies this year and still maintaining a 9% gross margin. So, the guidance has continued to be the same. We're probably looking at 9% this year.

Yes. Perfect. And maybe just another one on margins. I mean, obviously, heading down the P&L, you're impacted by some inflation pressures freight, wages and things like that. I mean how are they tracking year-to-date versus last year? Could that sort of start to become a tailwind through '23 to PBT margin?

Well, we would start to start seeing some leverage from the cost base. You could also remember in FY '22, we were carrying duplicate costs as well. We were running 4 different locations in New Zealand in terms of warehouse and office. That consolidated about September, sort of the later part of the year. Similarly, with the DAS business, it was more around sort of consolidating and setting our footprint and Mark within that business, and we did spend some time investing in new branches, but we've closed the large warehouse that was adding a significant cost to impacting that business profit margins? And then overall, from our underlying business, our core business, guys, there was a lot of work done towards the late part of '22 around overall cost structure. So, I would expect to get some leverage from that cost base in FY '23, taking into account all those different elements.

Great. And just last one for me. Just a comment that you made around how you're expecting enterprise and government, some of these bigger projects to drive demand in '23 or maybe SMB is a bit softer. I mean, are you able to give us any sense for anything that you're doing differently to see to capitalize on that versus previous years?

This is actually more a function of the market. We've seen a good strong performance from the mid-market and SMB last year. I think, obviously, the whole economic environment and so forth, while you bring a lot of opportunities, it may also mean that some of the very, very small businesses, which we support and service a lot, they may go into a little bit more and more into must buy rather than want to buy or wish to buy. So, we do feel it could potentially -- by the way, I don't see that impact right now. I just wanted to make it very clear. But logically speaking, it will come. On the other hand, what I do see right now is increased quoting activities for the larger, bigger enterprise type of projects. And again, this is something that I have forecasted for this year because I know that government will step in and support a lot of large enterprise customers like Qantas, for example, Qantas couldn't really do much in the last couple of years. Qantas is now actively doing a lot of data center refreshment things and stuff. Telstra is coming back. And other things and a few other larger enterprise customers that we have is showing a good strong degree of activities. So, I think we will, yes, we will start seeing some of those. I mean enterprise project is normally as a longer sales cycle opportunities, but we will definitely start seeing some dropping by mid and end of this year.

The next question comes from Edward Woodgate from CCZ.

Just trying to get some actual color on the gross profit margin guidance. So you did 9.4% in the second half of a back out your GP margins correctly. Is there any reason that you wouldn't maintain these into the full year? So just thinking that fourth quarter is a bit stronger from a retail perspective, is there -- are you just being conservative? Or might you have to discount some stock to move?

I think, Ed, it's all about the balance, which I think we've been talking about around balancing revenue growth with margin. And ultimately, we look to deliver around that 9%. And the selling through some of the inventory that we've built up is going to impact that?

Yes. So Mary answered perfectly, I just wanted to add a little bit more color to this. So, the way we look at it is very simple. DAS business growing and doubling this business is going to have a very favorable effect on this 9.4%, right? Improving New Zealand business, driving more commercial and corporate business versus the fulfillment retail business is going to improve and have a very favorable impact on this 9.4%. However, getting our working capital quicker into the way that we can reinvest it, liquidating some stock a little bit quicker, going -- getting that help from vendors and adding a little bit from ourselves, just to speed it up a little bit quicker, we'll probably have a negative impact. So, balancing those 3 and making sure that we're achieving the objectives and goals for the organization would be the trick, especially in the next 2 quarters. I think from Q3 and Q4, it will be a lot more stable condition. Our working capital will be in line, but we need it to be, hopefully, the New Zealand business will start performing at the high already like a business as usual margins. And then we're probably just going to see where there will be an opportunity to uplift it. But at this stage, we're still very much focusing on getting that balance around 9%.

Okay. I mean 9% to okay, gross profit margins. So, just sort to make sure I understand exactly, would it be right? Would it be fair to say that maybe you have slightly weaker gross profit margin in the first half and better in the second half. Is that the right way to think about it?

It's hard to say, yes, but probably, yes. Second half probably going to be higher yes, and the first half is probably going to be slightly lower. But we'll see. We'll try to balance it nicely throughout the year.

Okay. And then just on the 30% increase in quoting activity, sorry to focus on that. I know you talked about it a lot already, but it's just -- it's very positive. Just trying to get a sense of how much that translates to sales growth. Is that you might have touched on this already a bad line here for me. But does that -- can you give us some color about your win rates and how they vary a there? Or is it possible that customers are sourcing more quotes from various distributors manage inflation? Or is there any other factors there that we should think about?

Sure. So, I've looked at our win rates and our win rate has remained constant. So, you're absolutely right. Your question is to have a full merit. I mean are we quoting more, but we're winning less? No. We're quoting more, we're winning the same. So, it's the rate of between 15% to 16%. That's what normal conversion rate is. We're not dropping it. It's just a number of activities. But look, don't forget, our business has grown, right? So, we are not a $2.5 billion business animal $3.1 billion business. We're going to continue to grow this year. So, obviously, it's a natural to expect from more vendors, more partners big quoting activity. What I'm trying to demonstrate here that at the moment, business does not see any slowdown in activities. In fact, we're incredibly optimistic. My team is very optimistic. So, that's to that point.

Okay. That makes sense. And then just on your covenants. I mean, it doesn't seem like you're in danger of hitting them. But just so we know, we understand, can you just provide some color around what they would remind us what they are exactly?

That's correct. It's being predominantly a receivables facility that's funding working capital, it's really just an EBITDA debt covenant and a debt service cover ratio when both are well we in the range.

Are you able to tell us what the number is like the actual the lockup or the...

Well, there's 2 different facilities to prefer not to.

Okay. All right. And then just one more for me. So, a very pleasing strong networking services service and storage growth in the second half. Is that -- just trying to get a sense of like how to think about this, given you probably supported by the backlog being drawn down a bit. But everything we're hearing is that, that's a strong area of growth. Would you say that the second half. That's the new normal or...

Yes. Look, and you do remember, Ed, as well. I mean, I've called it out all along last year. I was saying that data and infrastructure, anything to do with solutions, complex solution selling is going to dominate the market. It started well. I agree with you. I think if you -- supply is getting better. We started to get a few things. We start shipping a lot of backlog. By the way, the backlog on data center in structurally is still like under $300 million. So, it's still very healthy. So that's going to continue to invoice and ship this year. But what's very pleasing to see, like you said and what you're hearing in the market, that area is actually a growth area. So, increase in quoting activities and other stuff is actually coming a lot from this area. So we're very helpful that enterprise networking and data center infrastructure vendors, including software, I think, is going to be our flagship growth -- our product segments this year.

[Operator Instructions] The next question comes from Aryan Norozi from Barrenjoey.

First one for me, please. Can you just give us an idea what your revenue split is between SMB and enterprise and Gap? Because the outlook commentary did suggest, I mean the outlook for SMB is obviously softer, but the enterprise business stronger. So could you just took what the relative magnitude of revenue contribution is to your business please?

It's remained about 25, 75 throughout 2022. I don't -- the true thing is it's a bit unknown for 2023. I do believe it's probably going to go 30% enterprise and 70% mid-market SME. But obviously, given the growth areas and net new areas of opportunities and net new growth, I think it's probably going to rebalance it back into the 75%, 25% because a lot of new markets where we're opening, it's actually more into the SMB area. Like, for example, I'll give you an example. So DAS business, predominantly, most of the business is done in mid-market and SMB. This is the 90% of the business, and that's going to -- and we're expecting for that to grow. So it's not the market growth, but Dicker Data is going to take share and grow in this segment. So, our internal books will probably remain about 25%, 75%.

Perfect. And if I just look at your PBT margins in the calendar '19, which is probably the best reference point because there's a lot of volatility during over betting about 3.6%. This half, you did about 3.4%. How do we think about -- given all the comments you made around duplicated costs and gross margins remaining flat around that 9% mark? How do we think about PBT margin into calendar '23 and '24 sustainable levels for your business?

Well, it's a very simple answer. Back in '18 and '19, we didn't have a $600 million New Zealand business, which at this stage is driving our PBT down. If you look at After, we actually delivered 4% NPBT last year. So, we just need to continue to drive better outcomes and on NPBT outcomes in New Zealand, and that's going to give us a really confident and good platform to continue to retain that sort of -- somewhere between 3.5% and 4%, we're very comfortable with given that we find that improvement in New Zealand.

Okay. And how much of the New Zealand margin drag is New Zealand being underlying weaker because of retail in terms of PBT margins from a group perspective, how much of it is due credit costs? I mean like your costs stepped up quite significantly in the second half. Could you just quantify what the cost -- duplicated costs were in this half? And so that's the first part. And the second part, how much of it you doing just being at a structurally lower margin because of retail if that's the case?

Well, the retail business in New Zealand was somewhere $200 million, and that operates on much lower margins somewhere in terms of BU profitability. What would you say what it would be...

Yes. PBT... On that particular about 1%.

Yes, about 1, I would say. And then in terms of costs, that was particularly around warehouse duplication. We had 4 properties. And in terms of Quantum in the first -- it would be more so the first half, though, because some of that was worked into the second half. But then we had interest rate increases, and we had a facility that we put in place to fund the working capital in New Zealand, which was driving the increase in overall costs, and that happened in June. And included in the New Zealand number is also -- which isn't available for the whole of the previous year, only your proportion is amortization of intangibles as well, somewhere around that $2 million mark.

So if I look at just cash cost in our business because interest costs were aware of DNA, we're aware of, but your cash cost in one business was about $85 million in this half, second half '22. Is that the new cost base? Or would that cost that $85 million step down into the first half of '22 and second half '20? Because it sounds like there's cost in this half in that...

Are you talking about New Zealand or just...

Yes, it was $85 million this half and $155 million for the full year cash cost of one business, so excluding depreciation and interest. Does that $85 million for the second half steps down and by what math sort of basically what I'm trying to get at is what the cost impost within this half that won't repeat next year?

It's a hard one to sort of gauge specifically because the biggest increase was around headcount and delivery on metrics within separate business units and therefore, performance-based payments being relative to those outcomes. So, it's a difficult one to say are without having further affecting that?

Okay. And sorry, last one, just around the debt profile. Like is it better to assume net debt improved slightly in first half calendar '23 and then second half '22 improves materially? Or will it remain elevated at these levels for the next 6 months? And then as these backlogs and supply chain issues formally fully get resolved, it will step down materially then? How do we think about cash emersion please?

I think in terms of debt, the working capital is still going to be funded by debt. So, whilst we stepped down working capital on sort of the existing volume, we are going to look at growing the business. So there is a reinvestment element as well. So, in terms of total debt, I would say it would remain around the same.

Okay. So, net debt, debt minus cash for 2023 shouldn't really fall that much. It's just your existing business working capital will improve -- so basically, net debt...

And then reimbursed, yes.

Yes, it's around 270 will continue into calendar '23 basis what I'm saying.

Yes.

Okay. And has anything in your payables in receivables and inventory days structurally changed versus pre-code. So if you understand...

So much inventory is running higher, but that has got to do with a type of inventory we're holding in the supply chain unpredictability, which some of that's going to get addressed. In terms of the receivables, part of the increase is possibly structural around the type of customers, the retailers who tend to pay a little bit longer days and the security integrators who had existing legacy terms that were longer. But the element of our receivables book that had extended terms due to incomplete orders or not being able to fulfill complete orders and therefore extending payment terms, we're expecting that to come back, and we should see an improvement in that in the debtor days.

Okay. But not improving in net debt, but that will be pretty, yes.

But then we're going to -- I mean, we're looking at growing top line again and further investing in other lines of inventory. So in terms of quantum of dollars, there's still going to be a requirement to reinvest in these new business segments.

The next question comes from Gabriel Correa, private investor.

Just continuing on the theme of receivables. The trend actually goes back closer to 2016, 2017 receivables are increasing at an increasing rate relative to revenue. So, I was just wondering about the competitive position and the incentives you're offering to your customers, and the other payment terms that are present there. Thank you.

Actually, Gabe, that's a very valid point because it's also in that environment where our competitors are offering extended terms and part of that in terms of that structural piece is that to remain competitive in the market, the offer of terms outside of standard terms. So, our standard terms of 30 days end of month, predominantly, but we've had some key sort of new partner acquisitions where terms are operating between 45 and 60 days. Now often, they're matched with support from the vendors in terms of extended terms, whether it was a result of supply chain disruption or whether it was very deal based and some of that's being supported with the vendors providing that. So, we just have to assess where the market's at as well. So, that's a factor that plays into sort of where we ultimately land on receivable days.

Okay. And so just to clarify, it is other terms part and parcel of the core business? Or are they increasing as you've done acquisitions and those are the terms the structural terms of the various businesses you're morphing into it?

So, those businesses that we've acquired had customer bases with terms that were higher than where we would have traditionally as an IT business operated at. Some of those were having active conversations with customers on bringing some of those back. But then the competitive environment sometimes dictates what that might look like. And there will be an element of that this year in terms of winning new business might require supportive terms that go outside of our normal terms.

The next question is a follow-up from Aryan Norozi from Barrenjoey.

Sorry, guys for having the question, just very quickly, to what extent, if any, did gross margins benefit from FX fluctuations, obviously, you hold inventory at cost if there's an audio that's falling relative to the U.S. as price increases that go through. in the second half, to what extent is that benefit the margin, please?

So... Would have fit into the margin, but in terms of other income, that represents FX revaluations realized and unrealized and the reduction in other income is a function of that mark-to-market where because of these extended ETA dates and the general hedging policy, we had open POs from prior periods for some U.S. vendors reflected at higher rates. So, when those goods came in were booked in at a more favorable cost. But the offset to that is the FX other income piece. And you can see in the other income line that's come off significantly.

At this time, we're showing no further questions. I'll hand the conference back to Vlad for any closing remarks.

Okay. Well, just quickly summarize 2022 as a very operationally heavy year, with lots of unpredictability in the market. I feel that our agility and our flexibility and our strong organizational culture have made us to deal with the best possible ways we could. I think it was a lot on. It was very, very busy having the stress levels where within organizations were very hard, and I'm so proud of the organization to actually handle it and show it once again a great resilience. We've put ourselves. We've done so much hard yards and hard work, especially on operations like consolidating our New Zealand business, bringing DAS business, and getting great platforms internally. We also went out into the market last year as well. We did a lot of big tech x road shows, which is a flagship of the industry share over 3,000 people attended. It's just been a lot on. So I think we're all looking forward to 2023 for what I call as business as usual here, just get down to basics, get down to the right metrics. Once again, it's $3.1 billion moving into a more growth. So, the opportunity in front of us is exceptional. I think it's probably one of the more -- like in my memory, one of the most enthusiastic way to look at it when I look at how much opportunity there is in the business. So, that will be my closing remarks.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect your lines.