Dustin Group AB (publ) ($DUST)

A warm welcome to the presentation of our second quarter results. My name is Samuel Skott. I'm the group CEO here at Dustin. And with me today, I have our CFO, Julia Lagerqvist. And if we get into the Q2 report, I'm glad to report yet another quarter with organic growth, strong cash flow and reduced leverage, while we continue to streamline and improve the efficiency of our operations. Net sales development was positive in the quarter with organic growth of 4.4%. Growth was driven by strong performance in the public sector and should partly be seen in the light of a strong comparable quarter. The gross margin decreased to 13.2% compared with 13.9% last year, but indicated a sequential improvement compared to the first quarter's margin of 13.1%. The lower margin is mainly explained by mix effects arising from strong public sector growth and continued price pressure in the Netherlands, also a weak performance within nonstandard services that had a negative impact. Adjusted EBITDA was relatively stable at SEK 103 million compared to SEK 110 million a year earlier, where implemented efficiency measures nearly compensated for a lower gross profit. Cash flow from operating activities increased to SEK 258 million compared to SEK 180 million last year, and this is primarily driven by improved net working capital. Leverage measured as net debt to EBITDA, dropped to 2.7x compared to 5.7x last year and is now within our target range of 2 to 3x. And if we then turn into some operational highlights for the quarter, we have taken important steps to further sharpen our business. And the discontinuation of the consumer offering is now completed in all markets, which means that we are now fully focused on our business customers. We have also initiated a new sales organization dividing relation sales between the Nordics and Benelux. By appointing a responsible for relation sales in Benelux, we get more attention and come closer to the customers in the Netherlands, the country where we've had the biggest challenge during the past years. This new organization will also create a stronger local focus in both our regions with better ability to capture local opportunities. To support our continued transformation within services and in the company in general, we have appointed a CTO with a clear mandate to drive both the transformation and efficiency improvements. We have also been reawarded EcoVadis Platinum rating, which further strengthens our position with our customers that have high demands on sustainability. Following weak performance and to accelerate our transformation, we have executed cost-saving initiatives within nonstandard services to better align the cost base with lower volumes, with savings materializing from the third quarter. And with this, I hand over to our CFO, Julia Lagerqvist, to give you some more details on our financials.

Moving then to Page 4, we look at our top line development. And as Samuel just presented, we saw 4% organic growth in the quarter, and I will now break this down somewhat. If you remember, we talked last time about how we, in the last year, shifted sales from Q1 to Q2 is related to the implementation of the new ERP system in Benelux will lead to delayed invoicing. This effect corresponds to around 6 percentage points in growth headwind in Q2. As we have said, we have fully exited our B2C business this quarter, and that drove roughly 2% decline in total sales. and that explains most of the negative impact coming from the decline in the SMB segment. On the opposite, we saw strong underlying growth in LCP, mainly related to the public sector and driven by two factors: One, the continued upgrade in the wake of the Windows 11 shift; and two, we saw some customer orders that were brought forward to mitigate expected price increases or more limited availability related to the global components outage. All in all, this explains the 4% organic growth in the quarter. We now move to Page 5 to look more closely at the LCP segment. And the sales in LCP was SEK 4.1 billion in the quarter or 5% higher than last year. The organic growth was 10%. So we continue to see a large negative ForEx impact from the strengthened SEC in the quarter. This growth was then on top of a strong Q last year, as just explained. And the growth was mainly driven then by the demand in public sector and related mainly to continued PC upgrades and customer orders brought forward. From a geographic perspective, we saw strong growth in Sweden, Norway and Belgium. We also saw positive development in our life cycle services, where a strong offering have contributed to a new contract as Sykehuspartner in Norway and the Swedish municipality region in Kalmar. I said before, we can see large volatility in sales between quarters in LCP. The gross margin decreased versus previous year but did improve a little bit versus previous quarter. The growing public business contributed to a negative customer mix effect with a large share of public customers that normally has lower average margins. In addition, the continued price pressure in Netherlands was a key driver for lower margins. Increase in take-back had a positive impact on both margin and EBITDA, and we also saw some positive development in our private label business versus last year. We also saw continued improvement in our cost structure, mainly thanks to the restructuring programs. This had a positive effect on the bottom line. And overall, this led to a segment result of SEK 105 million versus SEK 99 million last year and also improvement versus Q1 results. The segment margin ended at 2.5%, in line with last year. Then we move to the review of the SMB segment on Page 6. where our sales landed at SEK 1.3 billion or 14% below last year. Also here, we saw a negative ForEx effect. And excluding this, the decline was 11%. We see some signs of stabilization, but customers remain cautious due to the ongoing economic uncertainty. And we, in the quarter, exited the B2C business in all our markets, which explains more than half of the decline for the SMB segment. Excluding this effect, the organic sales decline was just above 4%. As explained earlier, this is a strategic move to a better focus on our core business, but we always expected some sales headwind coming from this. Looking at the product mix, we saw that the share of software and services sales increased to 13.3% versus 11.6% last year, which was more than effectively declining overall sales than an uptick in software and services. We saw continued decline in our nonstandard services as in previous quarters. The gross margin was stable versus previous year. We saw positive improvement in our base hardware business in both Nordic and Benelux, thanks to continued price discipline. But this was offset by lower margins on services driven by the lower volumes on nonstandard services with fixed costs. We have implemented cost-saving actions to mitigate these lower margins that will have effect in Q3. The improved cost base and previous cost-saving programs partly protected the segment result, but could not offset the lower volumes and the lower margins in nonstandard services. And the segment results landed at SEK 31 million versus SEK 46 million last year. This corresponds to a segment margin of 2.3% versus last year at 3%. Moving then to Page 7, you have an overview of the FTE development over time. we have constantly worked with our operational efficiency and optimizing of our stores a bit by bit. In the last year, in Q2, we did a major reorganization with a focus to improve our go-to-market capabilities, but also to cut costs to match our current market situation, and we removed over 200 of those. Since then, we have continued to reduce our workforce. And as you can see in Q2, we have reduced our total workforce with 226 FTEs or 10% versus the last quarter -- last year. If we prolong the period and look over 2 years, we have taken up more than 300 FTEs or a total of 14% of the total FTEs. Looking ahead, we have, as we have said, done additional costs in our nonstandard services to offset the declining sales, which was executed at the end of Q2. And we have also initiated further reductions with the aim of saving SEK 80 million yearly, with full effect from Q4. So our cost optimization journey continues in line with our strategic focus. On Page 8, we look at our leverage development. Leverage landed at 2.7x compared to 5.7x last year and 3.1 in Q1. So we've seen a continuous improvement, driven both by improved results and improved cash purchase as well as a positive ForEx effect. In addition, we also apply an updated definition of net debt, as described in the previous report, which drives 0.2x a positive effect versus last year. Overall, we are, of course, happy to see this improvement in leverage after a period of higher levels and that we are now in line with our target range to be between 2 to 3x. Moving then to cash flow and CapEx on Page 9, we see that the cash flow for the period was plus SEK 172 million versus SEK 89 million last year. So a good improvement, also on top of the improvement we saw in the first quarter. Looking at the details, we see that the cash flow from operativities before the change in capital was flat versus last year, and the cash flow from change in net capital was positive SEK 169 million despite an increase in inventory. We will look more at the net working capital on the next slide. But in total, the operating cash flow was plus SEK 258 million in the quarter. Cash flow from financing activities is mainly repayment of leasing debt and at a similar level as previous quarters. Looking at CapEx, we see that the total investment was SEK 92 million, of which SEK 39 million affected the cash flow. This is mainly linked to IT development investment and slightly lower than last year. Coming then to Page 9 and looking looking at the net working capital development, we see that net working capital landed at minus SEK 46 million. This is an improvement versus last year SEK 60 million and also an improvement versus the previous quarter at SEK [ 139 ] million. Accounts receivables declined supported by active actions to settle receivables, and this was the main driver of the improvement in net working capital. Inventory increased versus the previous quarter as expected, partly due to that the previous quarter was quite low due to timing effects, but also as a result of the shortage in memory components, putting pressure on inventory levels to secure delivery. But compared to last year, the inventory levels were actually declining. We do expect inventory levels to vary in the coming quarters, depending on opportunities to drive sales and margin as well as the need to secure deliveries in the current market environment with the impact from component shortage. As said before, we always have some timing effects between individual quarters, but our long-term target for net working capital remains to be around minus SEK 100 million. And with that, I would hand back over to Samuel.

Thank you, Julia. To summarize the quarter, we report continued organic growth, supported by strong development within the public sector and despite meeting a strong comparable quarter and the discontinued consumer business. Gross margin decreased mainly due to the mix effect from strong public sector growth and continued price pressure in the Netherlands. The adjusted EBITDA margin was stable since executed efficiency measures compensated for lower gross profit. Cash flow from operations was strong, and our leverage decreased and is now within our target range. Moving on to the market outlook. During this quarter, we have seen stabilization in the market. But looking ahead, uncertainty definitely continues due to the current geopolitical and economical climate and also the expected continuation of volatility driven by component shortages, where we expect prices to continue to increase and a potential limited availability on lower- and mid-end products. But building on this and looking forward, our focus going forward is very clear. we are driving a set of initiatives aimed at delivering a stronger Dustin and profitable growth. We are accelerating the execution of our strategy with a full emphasis on our position as the preferred IT partner for B2B customers. This means working closer with our customers and leverage on our full service offering. At the same time, we're strengthening our local go-to-market execution and performance through the new sales organization. It will increase our ability to capture local market opportunities and being faster at meeting local customer demands. We also continued to accelerate the transformation towards our standardized and scalable service offering, which is key to improving both efficiency and margins over time. In parallel to this, we are taking decisive actions on costs. We're implementing efficiency measures to deliver an annual savings of around SEK 80 million with full effect from the fourth quarter. And in addition, we are now conducting a full review of our indirect spend to further optimize our cost base. And finally, in this current market environment, we remain focused on managing risks but also capturing opportunities and do that supported with our strong customer relations strong and wide supplier base and relationship as well as our high delivery capabilities. And with that, we open up for Q&A.

[Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken.

Yes. Okay. Great. So I have a follow-up on the memory prices topic, supply shares et cetera. How has that impacted the volumes here in Q2, LCP versus SMB? I guess, LCP customers a bit more less price sensitive. But what do you see here?

If we look to the quarter, I think we clearly see an impact in the market of this shortage definitely affecting price levels. It has meant a lot of work for our organization, both in terms of working with our vendors, supply chain with our customers. But I think in the end, the net financial result, the impact of that has been very, very limited. What we have seen is that we have seen some volumes being brought forward into this quarter by some of our largest customers, who wants to safeguard availability for the rest of the year. So that has been, in some cases, in LCP. In SMB, we haven't seen that much impact at all, to be honest. We do see that kind of demand has flattened out but on a low level, of course, but at least flattened out, but no major impact from the component shortage yet.

All right. And do you see any risk as a vendor for your being squeezed when prices increases, i.e., that you have pieces in your inventory already sold, not yet delivered, but then we have this retro price increases from Dell or HP or how are these contracts settled?

I think we have both risks and opportunities, which we are managing on a daily basis. Risk lies with some of the larger contracts where we have a limited possibility to change prices on a frequent basis. But that's a risk we're managing by close collaboration with our customers, and of course, close revelation with the vendors and the partners. But we also have an opportunity in our transactional business towards the SMB market where we buy in put, especially, PCs on stock which increase in value over time and where we can add -- get some more margin when we sell it later on. And if we look into how this played out during this quarter, I would say that the effect has been neutral. We've seen some additional volumes in LCP, but other than that, I think the net has been neutral. But that's the way our business is positioned in this. And it's a lot of work, but we're doing it and we're doing it daily. And in the quarter, the net effect of it was limited.

Okay. Perfect. And one last question from me on Netherlands. If you could provide us with an update around the competitive market. Do you see any signs of stabilization or anything? And if it's possible to answer how much better would the gross margin have been if you exclude Netherlands and these price-pressured contracts?

Well, I can start -- if we start with the last question, that's not a number we're going to disclose. And if I go to the first question, I think, and I said it already in the Q1 call, I think the level we are at now is, from a market and price pressure point of view, the level we will have to learn to live with. I don't expect it to get worse, but I think this is the level it will continue to be, given the change in market dynamics, we're going from a larger share of single-supplier frame agreements to more a multi-supplier frame agreements, and that adds price pressure. But I think the level of that will probably stay as it is now. So I don't expect it to get worse. And the way for us over time to work with this is, one, the thing we're doing now with a stronger local management and local-focused sales organization. But then it's also about growing in the private sector and growing with our services, such as take back and life cycle services. But that's a journey that will take some time, but that's a journey we have started.

The next question comes from Mikael Laseen from DNB Carnegie.

Okay. Thanks. I have a question on the cost savings that you have initiated, SEK 80 million. Could you break down how much of this is headcount versus procurement and other efficiencies? And how much is already realized versus still to come?

So the SEK 80 million we announced, that is headcount, 100% coming from headcount, and we expected to be materializing during the fourth quarter. And on top of that, we have also now are performing a review of indirect costs but that is something for the future. The SEK 80 million now is headcount.

Okay. And should we expect any reinvestment of these savings into sales capacity or services or other things? Or will we see this flow through to margins?

I would expect some reinvestment of this into initiatives that we need to do to especially strengthen our go-to-market capabilities. but it will be done always with an eye keeping a balance of the bottom line result, of course. But I would expect a small part of this to be reinvested.

Okay. Got it. And you were talking about the nonstandard services here a bit at -- that part is weak or underperforming. Could you explain -- so how much of your services revenue with nonstandardized and standardized and the different profitability levels maybe on the revenue trajectory and what you're doing in these different areas?

No, I think we can say it like this. From a revenue point of view, the nonstandard part is the minority of our full managed services portfolio. But the area in itself is weak and an area where we're not making money in this quarter. And therefore, we need to take actions. Over time, as we've said, this is an area where we're transforming our customers and the portfolio into the standard portfolio which we have and where we have the majority of our business, and that's where our future lies. So what we're doing now is step-by-step, taking down cost, but in parallel, also looking if we can accelerate that transformation journey to eventually completely get out of the nonstandard business.

If I can add. I mean, we're also seeing that some of these customers are churning, right? So there is also going to be a continued loss of sales that we basically mitigated them with cost cuts.

Okay. Got it. And the final one on the LCP side. Just wondering if you can comment on the maturity profile of your current LCP contract portfolio? So are we seeing more renewals ahead or extensions or new wins that could impact top line or margins that we should be aware of?

This is not something that we disclose. But we always have a mix of incoming and outgoing and rewins of contracts. So this is something that -- this is a reality we live with every quarter

Okay. But if it's overall in an early stage, then you usually have impacting margins. I mean you typically have a bit lower margins in the early stages of a contract, and then it improves and gets better over time. So just in general terms, is if you would normalize over the past 5 years maybe...

Yes, sorry. But if we look back a couple of quarters, we have talked about that as part of the explanation, and that has been true, especially in Belgium, for instance. But I wouldn't say that, that is something that has a material additional impact now. I think more -- now it's more in the balance as it usually is. So nothing exceptional.

Okay. Great. to know. And then maybe a final one, if I may. You mentioned also that there was some sort of pull-forward effect here from potential price increases from your customers in the LCP side. Can you sort of indicate anything how much that potentially was in the quarter?

I mean it's hard to give an exact estimate of how much orders were actually pulled forward. We always have a bit of movement between the quarters. But if I will give a number, roughly, I would say it can account for up to 4% actually of orders being moved forward, around SEK 200 million in sales.

The next question comes from Daniel Thorsson from ABG Sundal Collier.

Yes. A question on the public sector prebuying and LCP. Did you see any differences between markets like Nordics versus Benelux, larger effects or smaller effects?

No. I think it was across the board, actually. We have this -- we're in active dialogue in all our markets with all our customers. I think we can clearly see the larger ones being the earliest to act and realize the market situation. So that's where it started, of course. But it's been -- it's a dialogue that is happening across all markets.

Okay. I see. And then linked to that, I guess, that the higher PC prices will affect low-price PC volumes most negatively, given price sensitivity. But how is your margin between high and low end PCs? Any meaningful difference?

In percentage points, I wouldn't say it's any meaningful difference. Of course, when the price go up, the actual margin can go up also, but -- in exactly the profit. But in percentage point, I wouldn't say that it's any big difference.

Okay. Okay. I see that's clear. And then on SMB growth, when will the B2C discontinuation fade on like comparable numbers?

Since we exited it now in this quarter, you will have this impact until the first quarter of next fiscal year, basically.

Okay. So it's kind of started in this quarter. So we have it for the next 3 quarters?

We basically exited everything in December in mid-December.

Will it be similar magnitude of the impact? Or like on a year-on-year basis here, you say around like 4 or 5 percentage points or even 6? Is that what we should expect within SMB?

I mean the SMB business doesn't have a large cyclicality. So you can assume that it's sort of -- it has been similar size over the year, I would say, without not having -- not having the numbers in front of me, to be very honest. But that will be my estimate at this point.

Yes. I see. That's clear. But then also linked to the question regarding reinvesting this annual savings, I mean, it's a balance between margins and bottom line and reinvesting in growth. But when should we kind of expect to get more margin targets, new financial targets? Like what level you would like to come back to? Because the old financial targets are not relevant at all today, I guess. So for us to understand like what kind of level of margin you would like to approach?

I mean, the targets that we have set now is the one that we have and the targets are set by the Board. Until then, we are the taste we are living with and we are trying to obviously get closer to as much as we can, but it's a long journey. I don't know if you want to add anything, Samuel.

No, as said. It's a discussion and a decision for the Board eventually. And if we get -- if and when we get to that point, we will come back to it.

Yes, because I assume that you are far away from the margins, which means that you shouldn't reinvest anything in growth. You should rather drive the margin upwards with the headcount reductions, cost reductions. But I also think that given what you said around the Netherlands that we will have to live with this new type of market development going forward, maybe a lower margin sustainably should be a better target to -- so just to get a comment on that over a time frame when we could expect it, like later in this year? Or what do you think is a fair time?

Let me put it like this. I think it's a very valid point, a valid question. We are not yet in a position to fully answer that. As soon as we are, we will.

[Operator Instructions] The next question comes from Thomas Nilsson from Nordea.

It's encouraging to see your balance sheet is much stronger with leverage in your stated financial target range. What is your thinking on capital allocation, given the stronger balance sheet with regards to dividends or potential share buybacks, M&A opportunities?

Our current policy obviously stands. So the 70% dividend payout out of net income. But at the moment, I would say we are not looking into any major acquisitions, obviously, but the focus is on the growth and the margin journey ahead of us.

Okay. And the second final question for my point. You saw a negative mix effect on the gross margin in Q2. What kind of mix effect on the gross margins are you expecting in the coming quarters?

I think that's very hard to estimate. It's very dependent on how the demand will fluctuate across our different segments. There is always a fluctuation quarter-to-quarter. So I think that's hard to estimate. We had it in this quarter. If we would see the same trend, we would have it next quarter as well. But I think that's too early to tell and hard to estimate.

As we said, the main mix effect is to move have increased sales to public where we have lower margins and sales declining in the SMB segment where we normally have higher margins. We've seen that trend in the previous quarter as well. But let's see where we -- and obviously, we don't guide for the future. So depends on how the future will develop for us.

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

Thank you very much. Well then, I'd just like to thank everyone for listening in and asking relevant questions to our Q2 report. And with that, we'll close the call. Thank you very much.