Dustin Group AB (publ)

Good morning, everyone, and welcome to this Q3 presentation from Dustin Group. My name is Johan Karlsson. I'm the CEO. With me here in the room, I also have Alexandra Fischt, who is the COO of Dustin. She will help us to better understand the work we do with networking capital and investments later on in the presentation. Also in the room is Fredrik Setterström, head of IR. Let's move to slide two and kick off the presentation with a short introduction to Dustin. Dustin is an IT reseller with its base in IT hardware and software products. As you can see in the graph up to the left, 86% of sales is IT hardware and 14% is software and services. Our assortment is primarily sold online. 60% of sales go through our online platform. The share in the Nordics is about 80% and in the Benelux 50%. As you know, we have recently launched our online sales model in the Benelux and the aim is to move to similar share as in the Nordics when it comes to online sales. We're present in six markets in Europe with our main markets being Netherlands and Sweden. And as you can see, our key customer focus is B2B representing 98% of sales. With that said, let's move to Q3 summary on slide three. In the quarter, we see some areas with really strong performance and others where we have challenges. We have in the quarter continued to develop Dustin in accordance with the plan that we shared with you in our capital market update earlier this year. I'm particularly proud of the team as we have in a challenging market been able to develop our business and improve gross margins and at the same time reduce networking capital back towards the targeted levels. The low demand in all our market is continuing to affect net sales. Net sales for the quarter was 5 billion, 582 million or 5.3% below last year. The organic growth was negative 9.4%. And as before, we see stronger performance in LCP than in SMB. LCP's organic growth was negative 5.5 and SMB was negative 17.4. During the quarter, we've been able to improve our gross margin, mainly due to strong pricing discipline in SMB and due to facing out of low margin contracts in LCP. But more about that later when we talk about the segments. In total, gross margin was up from 14.3% last year to 15.3% this year, and gross profit was up from 842 to 857 million. adjusted EBITDA at 169 compared to 201 million last year, resulting in an adjusted EBITDA margin of 3.0% compared to last year's 3.4%. Items affecting comparability was 25 million, mainly attributed to the integration of former Central Point and Vichiero Group in the NED Labs. EBIT was 97 million compared to last year's 140 and EPS was down from 0.75 to 0.21 for the quarter. Cash flow from operating activity was strong coming from the reduction of working capital and came in at 431 million positive compared to last year's negative 277 million. Leverage at 4.5 was above the company target of two to three. If we look at some of the operational highlights of the quarter, we can note that the new management team now has been formed by the recruitment of Jenny Ring, who will be the EVP for People, Culture and Sustainability, who already started, and by Julia Lagerqvist, who will take over as CFO in December. Further to that, we have expanded our financing facility with one year, now expiring in October 2025. The synergy extraction is moving according to plan, And for the SMB launch in the Netherlands, we now see 500 new online SMB customers coming in every month. A really good success there for the online team in the Benelux. So then move to some more detailed numbers on SMB on slide four. So sales in the SMB segment was 1,654,000,000 or 16.2% below last year, where the organic growth was negative 17.4%. The economic uncertainty continues to affect the demand in the market. This is especially true for small and medium sized customers. In the quarter, we have seen no difference between size of the B2B customers and the demand. However, for consumers, sales is stable on last year's level. In the quarter, we have seen lower sales of computers and mobile phones, as these categories are more affected by the economic uncertainty. Service chair, of sales continues to be around 12%, but the mix is moving towards services rather than software. The standardized managed services launched in the Nordics continues to deliver double digit growth. Gross margin develops positively in the quarter, mainly due to a strong product mix with less computers and mobile phones combined with strong price discipline in a price conscious market. Inflation puts pressure on the cost base and due to the shortage in sales, The cost base burdens the segment margin that ends up at 3.9% compared to 5.5% last year. Total segment result ends at 65 million compared to last year's 109 million. We then move to slide five and LCP. So sales in the LCP segment was 3,928,000,000 in line with last year. The organic growth was negative 5.5%. The expiration of the Danish contract affected the growth by 8% in the segment. The public customers group continues to perform well in all markets while the corporate sales slowed down somewhat in this quarter. Availability of all hardware categories is now back to normal. And from a geographical perspective, sales was strongest in the Netherlands, Finland, and Belgium. Gross margin developed positively coming from a stronger product mix with more advanced hardware and less computers sold. Further to that, less volumes in low margin public contracts improved the gross margin. Positive to gross margin was also the continued good development of private label sales. Now the strong sales is coming from the launch of our private label products in the Benelux. Despite the high inflation with pressure on cost, segment margin developed positively and ended at 3.6% compared to last year's 3.0. Segment result was 141 million, up 18% above last year. A very strong performance by the LCP team in this quarter. I will now hand over to Alexandra Fisht who will take us through the development of networking capital starting on slide six.

Thank you, Johan. Our networking capital is improving towards our target range of negative 100 million to negative 200 million. And we are closing the quarter on minus 22 million SEK versus last year plus four. And this is an improvement from Q2 with 228 million and an improvement of 336 million versus Q1. On total inventory, we decreased with 439 million SEK versus last year to a level of 1,031 million SEK. And the decrease is to the larger part related to customer specific inventory. And I'll come back to some more details on this on the next slide. Accounts receivable increased by 348 million SEK compared to last year, mainly related to higher business volumes at the end of the quarter. Accounts payable is lower than last quarter, mainly due to lower purchase volumes as a result of the decrease in inventory and lower business volumes overall. Moving on to slide seven. Let's look at some details on the inventory levels. Inventory decreased by approximately 190 million SEK in the third quarter compared to the second quarter, and as stated, 439 million from last year's Q3. We find a decrease in all parts of our inventory, but mostly in our customer-specific one. The core inventory, which is mainly attributable to our online sales, decreased slightly versus the second quarter and also compared to a year ago. This is due to, amongst others, optimized stock keeping and procurement of selected product categories. Inventory of private label products decreased slightly compared to the second quarter, but increased by 37 million year on year due to the successful launch in the Benelux. Customer specific inventory decreased the most by approximately 150 million compared to the second quarter. This inventory level of 1,031 million and its decrease is made possible by active collaboration with customers and partners benefiting from Dustin's strong position in the market that Johan talked about initially. We also benefit from the changes done to our procurement processes and foremost in the Benelux region. With this, we conclude a quarter where total inventory already is below the year-end targeted level of 1,100 million SEK. We aim to stay around this level for coming quarters and feel comfortable in this by our procurement changes implemented and a strong focus on inventory levels. Handing back to you, Johan.

Thank you, Alexandra. I think it's really good work from the team here to deliver on our target when it comes to inventory levels. If we now move to cash flow, cash flow for the period was 323 million compared to negative 380 million last year. Looking at the details, we see that cash flow from operating activities before changing networking capital was 142 compared to last year's 184, mainly attributed to the lower business result. And cash flow from changing networking capital was positive 289 million compared to last year's negative 461, mainly affected by the lower inventory level, as Alexandra was previously explaining, and the better cash from change in accounts payables. Cash flow from investing activities was 58 million compared to 52 last year, where the majority comes from the project of implementing the new IT platform. And cash flow from financing activities was negative 50 compared to negative 51 last year, where the majority is the amortization of lease debt. Let's then move and look at investments. So total investment in the quarter was 120 million compared to 68 last year. However, the cash investment was 58 million this quarter. The majority of the 58 million was capex related to IT development, which increased slightly from 41 million last year to 45 million this year. Investment in tangible and intangible assets was 52 million this year compared to 10 last year. Of the 52, only 13 was affecting cash. This year, this should be compared to five last year. The non-cash item is mainly lease contracts for offices and cars. Investment related to services was 23 million compared to 17 last year, and it's mainly attributed to the harmonization of data centers. But then move to net debt. The net debt increased slightly in the quarter from previous quarter and from last year. Net debt is up from 4 billion 450 million to 4 billion 613 million, mainly due to currency fluctuations. Leverage was at 4.5 up from 4.4 in last quarter. where currency affected the 4.5 number with 0.2 compared to the previous quarter. If you then move to slide 9. On this slide, we're trying to give you an update of our short-term actions and priorities. At the top, you can see the priorities where deleverage is our top priority short-term. However, margin and growth are, of course, remaining on our priorities. Deleverage You have heard us talk about the reduction of networking capital and the positive effect that will have on leverage. We still have some way to go, but the job with inventory is starting to give results. We're also negotiating better terms with our suppliers, and part of that will be seen in improved payables that will take us to the target networking capital of negative 100 to 200 million. Important to leverage is, of course, also the business result, here represented by margin and growth. If you move to the middle box margin, we are short term working hard with cost initiatives in order to improve margins. This is a key component in the integration synergies in the Benelux. Further to that, the work with both private label and take back is improving margins. Due to the market sentiment, we're also including the price discipline as a key component. In times with low demand, there is always price pressure. But here we need to use our strong position in the market and act to preserve margins. Then move to the growth box, where we still remain with our ambition from the financial targets over time. However, with current market conditions, this is hard to meet, but we remain active and already when the market turns. With the market data we have currently, we believe this to be at the end of this calendar year. important is that we continue to invest for the future. We do that under the umbrella of one. We spend time working with our culture so that every member of the Dustin team understands the culture and how we work together. We spend time on harmonizing the way we work in order to scale and drive down costs. We have also moved to one brand and we are now using this and make harmonized branding campaigns in all our markets. Further to that, We work on our IT platform. Alexandra will now go through some of the key activities in this area.

Thank you, Johan. You might recognize this slide from our capital market update in February earlier this year. We continue to invest in our One IT platform, and the platform is key to build our European IT powerhouse and to enable synergies. We have divided our investments into four different areas, all supporting our core business processes. With the platform, we will be able to further digitalize our customer journeys, easier scale across geographies and expanding to new ones, and of course cater for efficiency and automation. This means we will, with our new platform, have improvement in many of our processes, increase our level of automation and reduce integration time for acquisitions. When investing, we always try to create benefits for both our customers and for Dustin. And one example of this is the new web portals created for our LCP customers that will be launched within shorts. These will enable more self-service and personalized experience for our customers and more automated processes for Dustin. We work with continuous deliveries in all areas to the extent possible. This to be able to continuously capture synergy effects and process improvements. On total, we expect one IT platform to enable synergies of 60 to 90 million SEK annually in amongst others, the back office area and general processes. Our investments related to the IT transformation is estimated to 100 to 150 million SEK annually. With this, I hand back to you, Johan.

Thanks a lot, Alexandra. Let's conclude the Q3. So the low demand in all our markets is continuing to affect net sales. And as I said before, net sales was down 5.3%, organically 9.4%. And as we've seen in the segment's result, LCP was down 5.5% organically and SMB 17.4%. Positive in the quarter has been that we have been able to improve our gross margins, mainly due to strong pricing discipline and product mix in SMB and due to facing out of low margin contracts and private label sales in LCP. Gross margin was up from 14.3 to 15.3, which is really a good performance. Adjusted the beta at 169 million compared to 201, nearly affected by the lower sales volume. and the EBITDA margin at 3% compared to last year's 3.4. As we discussed before, cash flow from operating activities was strong coming from the reduction of working capital, came in at 431 million positive compared to last year's negative 277. Still, leverage remains high at 4.5 in line with Q2, but clearly above our own target of 2 to 3. Looking at the operational highlights, it's good to see that the management team is now complete with the recruitment of Jenny Ring as EVP, People and Culture and Sustainability, and Julia Lagerqvist who will take over as CFO in December. Further to that, we have extended the financing agreement with one year until October 25. And the synergy work that we have primarily in the Netherlands is paying off and giving a result in line with what we planned for. And there the launch of the SMB online engine is showing good results with new customers coming in. I think that concludes the presentation and we can open up for questions. Operator.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Daniel Thorson from ABG Sundial Collier. Please go ahead.

Thank you very much. I start off with a question here on the market and inventory. So the reduction in customer-specific inventory that you showed us in the last two quarters, That has likely contributed positively to sales as deliveries have been good despite the tough market. Does the lower level now mean that the outlook for deliveries in the coming quarters could be weaker as you don't have a backlog of customer specific orders and inventory to ship out as you had just three quarters ago? Which means that we should expect a continued drop in organic growth or at least be negative for another few quarters.

It's hard to predict actually, but as I said before, we believe the market will remain with low demand for the coming quarters and probably until the end of this year. We don't see any reduction actually. We think it will remain where it is at the moment. Obviously, the comparable numbers of sales will become easier and easier during the next couple of quarters.

okay fair enough um and then second question on gross margin it was quite strong here in the quarter and you elaborated well on it in a few in a few slides here but can you say something around like for like gross margin except the product mix i understand that pcs and smartphones fell quite a lot in the quarter and affected the margin in a positive way but for any services or products have you been able to improve the gross margin on a like-for-like basis or

Margins are on a product-per-product basis quite similar to before, and the whole job that we need to do is to improve the mix, and that we have done in the quarter in a good way, which means gross margin is up. So I think that's the whole plan that we have, is to actually change the product mix towards products with higher gross margin.

I see. And related to that, you mentioned that the PC market is down 30 to 35% at the moment. Do you have any outlook for that, for how long that could continue or further decelerate or accelerate the decline here?

The market data that we get and the experience, I would say, from previous situations like the ones we're in at the moment, we conclude that the market will remain weak for the coming two quarters and probably start to improve end of this calendar year. Yes.

Okay, I see. Okay, that's good. My final question is on the extended credit facility you sent out yesterday evening. You didn't mention anything about maintenance covenants, but only the covenant related to no dividends if you are about 3.5 times Have you had any trade-off there so that you got rid of any maintenance covenants potentially when extending this credit agreement or anything else we should be aware of except what you wrote in the press release?

I think what is important is of course that we have had now the discussion and continuously have a discussion with the banks on the credit facility. And obviously the facility is now updated to cater for the current market conditions. I think if you take specifically the dividend, let's say limitation, we don't see that as affecting us that much because we are clearly dedicated to come back to our target of two to three in leverage, which means if we are above 3.5, we would still question whether we should do a dividend.

Okay. But the extension has not change the maintenance covenants in the material way that we should be aware of? Is that how I should interpret it?

Yes, that's correct.

Okay, clear Johan. Thank you very much.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad.

Okay.

The next question comes from Mikael Leysin from Carnegie. Please go ahead.

Okay, thank you. Good morning. I have a few questions. First one is about CapEx. If you can say something how we should think about that going forward. Is this a level where we should expect CapEx to be? and how much more you plan to invest in the IT platform in the IT platform projects. That's the first one.

I think what we have communicated before is that we believe cash capex to be about 200 million this year and next year and the majority of that will come from the development of the new IT platform. So I think that what we saw this quarter around 50 is about where we will be for the coming for the coming quarters.

Okay, great. Thanks. I'm just curious about the services and software part of your revenue, one billion approximately in Q3. How much of this is services and how much is software? And can you say something about the profitability for this revenue stream?

Yeah, if you think recurring, standardized recurring services, it's about half of that. And profitability-wise, we're moving from all the standardized services really in the right direction. We communicated before that we believe services can have double the margin of hardware, which basically would give you a 10% segment margin. And we are heading in that direction at the moment. So I think I'm looking positive on the standardized managed services that we have now to full extent in the Nordics, and we are moving in that direction also for the Benelux.

Okay, so roughly 500 million is recurring services, and there you expect to have 10% margins going forward, but you're not there yet.

We are in the right direction in the Nordics for sure, not so far from the target, and we have... with what we are doing now in the Netherlands with the integration of the share entities and the launch of a European standardized portfolio, which we are copying from the Nordics, we believe that we can reach the same levels in the Benelux during the next maybe two years.

And can you say something about the approximate EBITDA margin that you have in the Netherlands?

I would say the margins If you would compare the margins in the Netherlands and in the Nordics are similar. So if you would look at the margin at the moment at 3.6 in LCP, that would give you, it's about the same in the Netherlands as you have in the Nordics. So no big difference. And the same, the SMB, of course, is much smaller in the Netherlands where it's more difficult to say actually to compare with Nordics. But LCP gives us the same margin in the Netherlands as in the Nordics.

Okay. But do you have an extra cost to, I mean, expand the SMB side in the Netherlands currently and maybe in non-recurring nature or including in... True.

We have a couple of things actually happening in the Netherlands on the SMB side at the same time. We are integrating all the Vincere entities, which then you will see partly on the items affecting comparability, but also, of course, that it's takes a lot of operational time and effort to actually do this integration. So it has a bit of a hampering effect on sales when it comes to recurring services. And then of course, launching SMB is not at scale the first day. So we are subscale but growing at the fast rate. So we're moving in the right direction, obviously not where we want to be on profitability.

But this is something that is

um but i mean strategic um decisions that you have taken to expand the f&b side so it's um i guess affected by the market is growing from low level and improving the platform and you're totally right and i think some of the components are really important now like the one brand now we are on the dusting brand everywhere so we can do branding campaigns for the smb market in the netherlands and belgium at a much more efficient way than we were

Previously when we were on different brands, so there are there are positives, you know actions that we've taken to To become scalable at the faster rate also in SMB Okay Maybe you talked about that in the presentation I don't think maybe you can remind us where you are in that journey what you have to do in terms of platform and I don't know What remains to be done? for you to start to scale the SMB revenue in the Netherlands?

Yeah, on the hardware side, I think we have everything in place. We have the team there. We have the processes. We are using the Nordic IT platform. So we are able to run the business the same way as we do it in the Nordic. So there, it's a matter of time and investment, of course, in the market. When it comes to services, we are integrating the entities of Vinciera during the next three quarters and launching the European harmonized portfolio of services in the Netherlands. That work is ongoing and that will give us the foundation for similar business in the Netherlands and Belgium as we have in the Nordics today in managed services.

Okay, got it. Also, if you can also comment regarding the non-recurring structuring projects that you had in Q3, 24 million, what did you do?

Say again, Mikael.

You had 24 million in non-recurring structuring costs in Q3. Just wondering why you had this cost.

That is basically... either dismantling entities in the Vinciera group, either systems, offices, or people, or it is efficiency improvements when it comes to central point where we take out people as we are becoming more efficient in our operation.

Okay. And how much should we expect in the coming quarters when are you, have you done these restructuring measures?

I think the extraction will be done in the center point slide it will be done in Q1 and in Vinciere it will be done by somewhere in Q2 Q3 next year then we are all done after that with the current setting as we have and during this time until Q2 Q3 you will then probably have non-recurring charges Yes, true. Yes, that's true.

The final question is on the financial items. If you can say something about the interest rate you have right now and if you have any changes in this new credit facility.

I think at the moment the debt level is about 5.3 billion. 87% is in Euro-based currencies. And if you look at the interest rates, they are at 68% fixed. So quite a high share of hedging down on the interest rate side. And the average time of hedging is 2.1 year. So two years out, basically. We do have an increase in financing costs, partly due to the market interest rates, but also due to the fact that leverage is high. but no significant change from before due to the information.

Got it. So that means that you will be able to continue with the charging measures in this new structure?

Absolutely. Okay, good. Thanks. Thank you.

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

Okay, thank you very much for attending the Dustin Q3 quarterly result presentation and have a really nice day. Thank you very much.