Dustin Group AB (publ)

Great. Thank you very much. And I'm sorry for the slight delay here with the connections, but here we are. So good morning, everyone, and most welcome to our second quarter presentation and conference call. I hope you're all well. Here on my side of the call, as I said, this is myself, Tomas Ekman, and we have Johan Carlsson, CFO, but also soon to be CEO, and our head of IR, Fredrik Zetterström, here in the room as well. So we present our second quarter results for fiscal year 2022-2023. And our Q2, as you know, from December to February was on a macro level very similar to Q1 and continued to be characterized by a cautious trend among small and mid-sized companies in the SMB segment, while demand remained favorable within the public sector and large companies. An improved product mix within the LCP in combination with the expiry of the agreement with the Ski 5040 in Denmark supported also a good margin improvement sequentially. from Q1 and also the reduced tied up capital and inventory enabled and improved networking capital and lower net debt during the quarter. And I must say it is encouraging to continue to be able to present the progress for the quarter that is in line with the scenario presented during the capital markets update in February. We continue the year with a total growth of 2.2%, despite an anticipated and clearly cautious development in SMB. Access to standard hardware was good and has fueled a certain degree of price pressure in the market. And as we have said before, we see the same patterns as in previous economic crisis that SMBs are the first ones to react, corporates are a bit slower, and the public sector continues to spend. And typically, these periods have lasted around two to four quarters, and now we have passed the second one. And although we have a negative growth on SMB, we can see a stabilizing market, especially in the later part of the quarter. We are also further progressing well in our integration in Benelux. And as you saw this morning, we are now taking the next steps in efficiency and customer attention by merging our two large corporate and public organizations to one. And they will be headed by Michael Hogan. who previously was responsible for a Nordic LCP organization. And he has great knowledge in combining countries and merging and building together one organization. So this is a very good move and also will, of course, create more synergies for us. And that's, of course, lower cost over time, as well as an improved customer offering. But let's go into our Q2 presentation and some more details. As you know, we have our, for your reference, we have on slide two, but I think we can move directly to slide three for some financial highlights. As I said, the second quarter continued to be dominated by general economic uncertainty and a cautious trend among some of our customer groups. The availability of hardware was good and the continued demand among large customers laid the foundation for favorable growth. despite a cautious attitude among the small and medium-sized companies. Net sales up 2.2% to 6.2 billion. Organic growth was negative 2.4, of which minus 10 was for SMB and plus 1.1 for LCP. After a weak start in December, demand has stabilized within the SMB segment, but also It remained obviously cautious, but especially maybe on the small size companies, but large companies in the segments together with the consumer sales displayed a positive growth during the quarter as a whole. Development in S&P was generally strong, both among large companies and to the public sector, but was impacted negatively this quarter by the expiry of the Danish framework agreement with Ski during the first quarter. But a high level of activity and also a strong influx of new customers in several of our markets, in all markets, have also offset this to a certain extent. And that has also been, despite our more generally or more selective and margin-focused attitude towards new customers and agreements from our side. Gross profit came in at 914 million SEK, up from last year's 904 million SEK. The gross margin amounted to 14.6%. for the quarter, which is a good improvement or a distinct improvement from compared to the 13.4 in the first quarter, so sequentially very good. The improvement is mainly attributable to developments in the LCP segment, where the product mix have started to improve and improved over the quarter with a larger share of more advanced hardware, and combined also with the face-up of the major Danish agreement set with its low margin. Growth margin within SMB weakened during the quarter as a direct result of high proportion of campaign goods and shift to more basic alternatives in the product offering. Adjusted EBITDA amounted to 212 million SEK and the adjusted EBITDA margin was 3.4%, which clearly indicates an improvement compared to 3.0 in the first quarter, which is, of course, encouraging to see. amounted to 157 million SEK and including items affecting comparability of minus 9 million SEK. And those are primarily related to the integration of Vinciera and Central Port. Earnings per share was 0.72 SEK compared to last year's 1.27 SEK. Cash flow from operating activities amounted to 250 million SEK during the quarter and improved sequentially compared with the negative 85 million SEK in the first quarter. And net debt decreased with 152 million SEK to 4.6 billion at the end of the quarter compared to 4.759 million SEK in the first quarter. And as a result of a slightly lower profit, net debt in relation to adjusted EBITDA was 4.4%. compared to 4.3 in the end of Q1. The current leverage level, however, is assessed as being temporary, and we see that it will be expected to fall in the next few coming quarters. Other operational highlights this quarter is, of course, that the inventory declined to 1.2 billion SEC compared to 1.6 in the first quarter. And this is mainly as a result of reduced customer-specific inventory. And here I must say I'm really proud and, of course, encourage what we have achieved here. And this strong improvement means that we are ahead of our target, our own target of an inventory value of 1.1 billion SEK at the end of August, i.e. the end of this financial year. And it also shows that there is the imbalances that has been during the fall has started to become more balanced in the supply chains, which is, of course, very good. Then, as you have seen, we updated our financial targets and segment reporting in our capital market update that we held on February 21st. We will come back to that later on in the presentation. And we are on track with the integration in Benelux and continue with the synergy extraction, the identified 220 million SEC, where we see clear effects will come in the second half of this year. And also, as an example, merging our two LCP regions to one as the next step in the integration. And then, of course, the great news that Johan Carlsson has been appointed as the CEO. Very good. Good, Johan. You can, by that, also continue to take us through the segments.

Yes, let's move to the next slide, slide four, and the SMB segment in some more detail. As this is the first quarter with a new segment definition, including B2C, you will see some new numbers and levels in the segment report here. Sales for the quarter ended at 1,822,000,000 representing a negative organic growth of 10%. In the quarter, we saw that the economic uncertainty is continuing to affect our small and medium sized B2B customers. However, sales to the larger SMB customers and consumers was slightly stronger than last quarter. From a geographic perspective, sales were strongest in Denmark and Norway. In all markets, And the promotion activity is high as everyone is trying to increase sales at the same time as demand is low. As we continue to, and this affects margin somewhat negative. As we continue to realign the service portfolio, the share of software and service was down from 14.6 last year to 11.3 in Q2 this year. The main reason being a lower software share, but also the move away from time and material consulting and outsourcing in the service area and by that moving towards the standardized managed services. This is now possible as the integration in the Benelux is continuing and the data centers are being consolidated and common European assortment is introduced. The segment margin reduced from last year's 6.7 to 4.4. Lower volume due to weak demand put pressure on margins as cost base the actual volumes affected by high inflation. Added to that, the high share of promotional sales is weakening the margins. Balancing the weaker margins is the strong sales of contracted recurring services with margins above average, and also private labor is continuing to deliver strong sales and margins contributing positively to the margins and profits. Segment result ended at 80 million compared to last year's 135. If we then move to slide five and the LCP segment, where you could see that sales in the SP segment was 4,450,000,000 in the quarter. That was an increase of 7.4%, of which 1.1 was organic. During the quarter, sales slowed down due to the expiration of the large Danish contract, as Thomas was mentioning before, where only residual volumes were delivered in the quarter, and compared to last year's sales, For the same quarter, we dropped approximately 250 million in sales. However, we saw very strong sales increase in both public sector and large corporates outside the Danish public sector. Availability of standard hardware continues to be good. And in this quarter, we could also see clear improvements when it comes to the more advanced product categories. From a geographic perspective, growth was strong in all countries outside Denmark, but strongest in the Netherlands. Segment margin was 3.9% compared to 4.2% last year. Product and country mix was positive to the margin, while inflation put pressure on costs, affecting margins negatively. As in SMB, private label products affect margins and result positively in the quarter. And we continue to see really good progress in the Benelux region with great potential. Segment result for the quarter was 173 million, which was up 1 million from last year. We move on to networking capital on the next slide. So, networking capital end of the quarter was 229 million compared to last year's negative 433. Sequentially, the networking capital was down from 336 million. The higher networking capital compared to last year is mainly an effect of lower accounts repayables as purchasing was low due to the ambition to reduce inventory. If we look at the details, we can see that inventory in the quarter was 1 billion 220 That was 39 million down from last year and 390 million down from Q1. This is the result of a better availability and improved processes in regards to inventory management. And more about inventory a little bit later in the presentation. Accounts receivables was up 237 million, mainly as a result of higher sales volume, but also the mix changed towards more LCP with slightly longer payment terms than S&P. If we look at accounts payables, they were 3,428,000,000. This was 356 million lower than last year. The majority of this effect comes from lower purchasing volume due to the active work of reducing inventory levels. As the supply chain situation is now improving and our way of operating, mainly in the band lacks, is being changed, we continue to believe that inventory will come down to the more normalized levels at around 1.1 billion during the year. This makes us continue to believe in our target range of negative 100 to 200 in networking capital. If we look at leverage, as Thomas said before, net debt in relation to rolling farm on EBITDA at the end of the Q1 was 4.4, where our target is to stay in the range of 2 to 3. Currency differences and lower result affected net debt and leverage upwards during this quarter. If we then move to look at inventory in some more detail on the next slide, here you can As we said before, total inventory level at the end of Q2 was 1,220,000,000 compared to last year's 1,259,000, and last quarter stand of 1,610,000,000. And as you can see in this graph, the main improvement comes from the customer specific inventory, where the inventory value came down with 338,000,000. And this is actually the result of mainly in the Menelax, but also in the Nordic a joint effort between supply chain and sales and bringing customer specific inventory down. We also have actions in place to further reduce the inventory levels down towards the 1.1 billion as we have stated before. Having said that about inventory, let's move to the next slide and cash flow. So cash flow for the quarter was negative 19 million compared to 15 positive last year. Looking at the parts, we can see that cash flow from operating activities before changing networking capital was 122. This is significantly lower than last year, mainly coming from a lower operating result. If we then look at change in networking capital, which is positive 122, slightly above last year, where the main difference really is being the low accounts payable due to inventory reduction. otherwise this change would have been bigger and sequentially we will see that coming in the next quarter. Cash flow from investing activities was 64 and which 52 was related to IT investments and this should be compared to in total of 75 last year. And cash flow from financing activities was 205 negative compared to 298 negative last year. This is mainly attributed to amortization of Progressive investments, total investments amounted to 79 million compared to last year's 19. The cap is related to IT development. It was 63 compared to 40 last year. Out of the 53, 34 is related to the project of moving Dustin onto the same ERP cloud-based system. Investment intangible and intangible assets decreased from 40 last year to 15 due to this year. Finally, investment in assets related to service provision was 12 million compared to last year's nine. All in all, 64 million out of the 79 in CapEx was affecting cash flow. The other four changes in lease or rent contracts. And by that, we move back to Thomas.

Great. Thank you, Johan. And let's move to the next slide here. Just to recap on our updated financial targets and our goals. As you saw in February when we had the capital market update, we aim for a 10% three-year annual growth rate of EPS. And that EPS growth will be supported by an 8% organic target growth for SMB and a 5% organic growth for LCP with segments margins, according to our new segment reporting, where we aim for more than 6.5% for SMB. and more than 4.5% for LCP in the coming three-year period. We keep our leverage target to be between two to three times EBITDA, and we are working on our way down on that, as Johan mentioned. And we also keep our dividend target to distribute at least 70% of net profit, obviously, depending on the financial situation at the time. And then we want also to put even more light and emphasize even more on our CO2 target where we aim to decrease our emissions with 25% in the coming three years, contributing to our already communicated and ambitious 2030 commitment of being CO2 neutral. So these are our targets that we will follow now for the coming three years and continue after that as well, obviously. If we then move to the next one where we have a new segment reporting, this is a fairly busy slide, but you are used to that. Where we have a new segment reporting and supporting the cost focus we have, where we have merged B2C into SMB. And seeing that that is, of course, more logic to do now when B2C holds for 2% of sales, and it also reflects how we are organized. And this means that the new segment margin target for the segment, as well as the new target for the remaining central cost, which is now also more clear or clear at central cost. And we do these changes, of course, in a way that we want to increase transparency and the clarity and understanding on how we look now, given that we have developed a lot since the IPO and it looks a bit different than we did at the time a couple of years ago. And as you saw this morning, we also merged our two LCP organizations to one, which will give us efficiency, one-way working, and better customer offering across countries and across groups. And if we then continue to the next slide here, our path decreased our CO2 impact. I mean obviously we have our clear targets towards our 2030 commitment of becoming CO2 neutral and we see and we can also drive the trend towards sustainability and where sustainability is truly becoming an integral part of buying IT in our parts of the world, in our markets. We aim for a 25% reduction in CO2 equivalents per million sex sales in the coming three years. We are doing and have done a lot of actions to improve and reduce. Like for example our take back offering and we have linked our financing to our sustainability targets and we are also compliant with TCFD as well as taking on a full value chain approach including scope 3 in our work. There is obviously a lot more to do and more potentials where we will as soon as possible sell more refurbished products online. We will also use or we are using and start to use even more our data that we gather to help our customers to make the right choices. And not the least, of course, make use of our size and scale to influence our vendors, our suppliers, and by that push the whole value chain forward to more sustainable solutions and improved ways of working. So we have clear targets in place for achieving this. So before moving in then to Q&A, let me just sum up the results on the next slide here. Net sales grew 2.2% to 6.272 billion SEK. Group organics net sales growth was negative 2.4 in constant currency. Organic growth in SMB was minus 10 and LCP was plus 1.1. Gross profit of 914 million SEK compared to 904 last year and gross margin at 14.6%. And margin change is due to the sales mix with the higher share of LCP sales, but it's also counteracted by a positive product mix as we were into before. within LCP, which is great. And of course, sequentially very improved margin, which is good to see. Adjusted EBITDA was 212 million SEC and adjusted EBITDA margin of 3.4%, a clear sequential improvement here again, versus the 3.0 in Q1. And margin was mainly affected by higher share of campaigns and cost inflation as well, if you compare to last year. EBIT was 152 million SEK, and EPS amounted to 0.72. And cash flow from operating activities was 250 million SEK. And leverage, as we mentioned before, was 4.4 in the past 12-month period. Yes, and on operational highlights, obviously, Johan Carlsson has been appointed as new president and CEO. We have updated our financial targets and segment reporting, and very encouraging, we have reduced the level of customer-specific inventory, pushing ourselves ahead of our plan on that. Scenic destruction on track with the clear effects of second half of 2022-2023, and with full effect expected in the next financial year, 2023-2024. And as I said before, as an example, we have emerged the two LCT organizations as the next step of increased scalability and knowledge sharing and, of course, customer offering to improve that. So to summarize, in recent quarters, market development has been characterized by general economic uncertainty and a cautious trend in some of our customer segments. The performance was in line with expectations and in historical terms reflected the pattern, I must say, in our business. We are demonstrating progress towards our target scenario presented in the capital market update, and we have seen some stabilization within SMB in the later part of the quarter, which makes us cautiously optimistic ahead of the upcoming quarters. We are on the right path in a turbulent time, and it is, of course, with complete confidence that I hand over the leadership to Johan Carlsson as the new CEO of Dustin from Monday. Johan has, as you know, extensive experience and solid knowledge of Dustin and in all the markets we operate. And also Dustin is well equipped to address the short-term turbulence in the market and is also well placed to meet the strong underlying market trends. And obviously, I want also to take this opportunity to extend my warm thanks to all employees, customers, shareholders, and other stakeholders for your confidence and fantastic time at Dustin, which I will continue to follow from another and I wish obviously also you want the best of luck in everything with the team and continue journey ahead and Great, I think with that we can conclude our presentation and take any questions you might have The next question comes from Mikhail a scene from Carnegie, please go ahead Okay, hi good morning

Yeah, I have a few questions, starting with your comment about science of stabilization in the SMB segment at the end of Q2. Can you explain what you mean here, what you have seen and what this means?

For sure. I mean, what we see was or what we saw in the beginning of the quarter. Thanks for the question, by the way. But what we saw in the beginning of the quarter was December was weak. And it was weak all over, especially in Sweden. It was weak. But in all Nordic countries, it has been stabilized. And we can see that we are fairly sort of flat in the end of the, in the later part of the quarter. And that makes us, and we can see continued development there. And that, as I said, that makes us cautiously optimistic of that we actually are seeing the same trends as we have seen before in economic crisis where the smbs i said they are early to react and they are reacted a lot in in in first quarter and also continue with in the beginning of this quarter um but now we can see that it's stabilizing and that also shows that i mean continuously the smb customer the sm our smb customer also want to do continue to do business where their customers insert and that is self-consciously encouraging to see.

Okay and was it flat month by month or was it year on year and just to understand the trend in the quarter?

Yeah it was a flat also from year on year but also from or sorry from month by month but so it was it was it was yeah it was stronger in the end of the quarter than in the beginning of the quarter.

Okay. Can you in more detail talk about the market situation, the supply of IT products, standard and advanced, where you are compared to last quarter and the quarter before, and what you see ahead, and the demand side, how that is affecting the volumes and the prices?

What we can see, I mean, this is obviously a mix of what all the things we do internally versus how the market is. But if you look at the market, we see, as we said also here before, is that there is a much more stable delivery and the supply chains are much more in balance now than they were during the fall or during the last quarter and also a year ago. As you remember, there was a lot of imbalances and products were coming and China was opening and closing. And now it's more back to normal situation, and which is also very encouraging to see that the supply of more advanced products, especially for that we sell a lot to the LCP segment, that is also coming back to play in a much better way, which is then at us translated to a better gross margin. So I think that at least as it looks right now during this quarter, it seems like we have, or we see a much better balance in our

in our procurement and in our in the supply chains okay i'm just curious about i mean following up on this i mean the next shift towards more advanced it products how significant is that what is the magnitude in improvement and is it fair to assume that this situation could continue and support the lcp margin also in the coming quarters with this and more of a temporary improvement there

I think we will move back to more normal share of advanced versus standard in the coming quarters. It's improved a little bit during this quarter, and I think the margin effect is hard to calculate, of course, on exact numbers, but I think on the gross margin level, you could feel that there is a support of maybe 0.2 to 0.4% additional margin coming from the advanced side this quarter.

so it's not it doesn't change the world but it's at least positive to the total margin levels okay got it and my final one if it's okay it's on the cash flow and the outlook that you had on the last slide networking capital commentary coming down from plus 300 to minus 100. can you talk about the what you're doing exactly to take it, to take networking capital to those levels? And if this is to assume already by August this year?

Yeah, I think we're doing a couple of things in the area of networking capital that we believe will take it to the levels around our target. One is obviously to continue to bring down inventory to the 1.1 level. and the other one is to work with the synergies as we are pooling purchasing together in the in the whole group where we can ask for better payment terms we have seen that come through in i would say four or five distributors so far and we will see that effect partially in q3 and i would say almost fully in q4 so there you will see better account payables coming from the terms change. And then finally, we are setting up a whole new process for collecting receivables in the Benelux region, where I would say it's a bit more challenging situation to collect there than it is in the Nordics. And we need to be more on our toes to collect money in that region. we have put in place and there we believe that can improve receivables towards the negative 100, 200 goal. So these three, I would say, are the key components to bring it down with approximately 300 million more or 350 million more in that range.

Okay, got it. And the payable side, the distributors there that you have new terms with, those are in place, but how many more are Do you still have to renegotiate and change?

They are negotiated, but not in place in all the distributors. I think there are maybe one or two left to be negotiated, but from the agreement we have now, they should all be in place from, if I'm not incorrect, I think from the latest one from the 1st of May. So we are, as we speak, let's say, collecting them. synergies.

Okay, got it. So this is more or less in place that payables can go to the level where you what you highlighted in the capital markets presentation, I guess.

Yeah. Okay. We've talked about that before that we balance of course payment terms with other terms towards the suppliers, but maybe we have pushed a little bit harder on payment terms now in order to make sure that we get back to normal level

Okay, thank you.

The next question comes from class Danielson from Nordea. Please go ahead.

taking my questions. So just a couple of follow-ups and another couple of questions from my side. If I understood correctly, it's sort of that 0.2 to 0.4 percentage point improvement on the product mix. Is that sequentially, I guess, from Q1? That's the first question. And then I was just wondering, is the rest the kind of Danish contract that's shurned or Or could you also quantify how much support that is giving on the gross margins would be super helpful?

Yeah, I mean, yeah, it's sequential. Just first answer the first question. Second question is that you could say that the Danish deal last year was about 350 million Swedish. at very low margins. And we have replaced them with average margin deals compensating that. So I think you can get that from a mathematical perspective, the impact it has. But that's the way it has panned out in the quarter. The neutral sales development compared to last year is actually a negative in Denmark and then positive in all other countries compensating.

Okay, and then if we just look at the gross margin in total over the coming few quarters, I guess you're guiding that it should come down a bit from this level, or am I interpreting that correctly, just to be very clear?

No, it was...

Just from the comments on the product mix being better and then that coming back a bit. That's 0.2 to 0.4 percent levels basically.

I think honestly we are set up for at least continuing with the bondage. We have even improved them a little bit as we are getting back to more normal product mix. And as we are catching more new contracts at better levels than the one we lost in Denmark. So I think it can continue to improve. Obviously, it will be some ups and downs, but trend wise, it should go up. Yes.

Okay.

Very helpful. And then just ending off on the cash flow side, I mean, clearly a big inventory release. Then you have some kind of offsetting in the liability side. on those liabilities do you expect that to swing back in the coming quarters and then also on the inventory side do you see any additional scope to kind of bring that down lower than the 1.1 billion or how should we think about that?

I think the 1.1 I mean we set the 1.1 as a target because it was if you added the different entities together before the inventory started to go up that was about the level we had I think we will regroup as we reach 1.1 and see if we can do better than that, because obviously we don't want to have more inventory than we need to. So I'm sure we will come up with a target that is improving from the 1.1, but let's first hit the 1.1. When it comes to the networking capital in the quarter, it's really hard to reduce purchasing at the same time because when you reduce purchasing to reduce inventory you do unfortunately get less payables which is good but affects the working capital a bit so as soon as we are back into stable purchasing i.e stable inventory that will be on a lower level than before that will improve as well

Okay, fantastic. I think I'll close out there. Thank you.

Okay, thank you very much, Charles. Thank you.

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

Okay, very good. Thank you very much everyone for participating and listening in and thank you also for all the years here and we look forward to meet in other opportunities in the future. Thank you very much and have a great day. Thank you. Bye bye.