Dustin Group AB (publ)

Good morning, everyone, and warm welcome to this Q3 presentation from Dustin Group. As you heard, with me here in the room is Julia, our CFO, but also Fredrik Setterström, head of IR. Let's move to slide two and Dustin in summary. Dustin is an IT reseller with its base in IT hardware and software products. And as you can see in the graph up to the left, 82% of sales is IT hardware and 18% is software and services. Software and services has in the last years become a larger share of the total sales and has increased in importance. Our assortment is primarily sold online and 60% of sales go through our online platform. The share in the Nordics is about 80%. And in the Benelux, the share is lower. However, as you know, we have recently launched our online sales model in the Benelux. And the aim is that we would move to a 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 the 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 slide three and a little bit more about the quarterly numbers. As in the last four quarters, sales was affected by a weak market with continued general cautiousness by customers in many of our customer groups. Sales in the quarter was 5,455,000 or 3.5% below last year. In S&B, organic growth was negative 10.2% and in LCP, negative 0.8. The negative 0.8% in LCP was a significant improvement over Q2 and the result of new customer contracts. Gross profit at 821 million was down 36 million or 4%, while gross margin ended at 15.0% down from last year's 15.3%. New contracts in LCP and high level of promotion sales in SMB affected the margins negatively. Adjusted EBITDA at 130 million compared to last year's 169, with an EBITDA margin down from last year's 3.0% to 2.4%, mainly as a result of lower gross margins and lower volumes. Items affecting comparability was at 1 million as the integrations coming towards an end. EBITDA was 86 million compared to last year's 97%. Positive was cash flow from operating activities that ended in 454 million compared to last year's 431, mainly coming from a strong working capital management. Leverage ended at 3.0 compared to last year's 5.0, where the main effect being the repayment of debt after the rights issue. Some other highlights from the quarter was that we continue our focus on synergies and reducing costs. and that Dustin joins the science-based target initiatives. And last but not least, the new PC launch from all major PC manufacturers where they launch PCs with AI capacity. And we think this will be a help to drive a better market in the future. Now let's move to some more details on the numbers and Julia.

Thank you, Johan. We start by looking at the SMB segment on page four, where sales landed at 1.5 billion SEC, or 10.9% below last year. And as Johan mentioned, the continued economic uncertainty is still affecting demand in all markets. As in previous quarters, we saw low demand for computers and mobile phones, while the share of software and service sales increased so much, just above 12%, due to a healthy trend for contracted recurring services in the Nordics, combined with weak hardware sales. There has been larger-than-normal promotion sales due to clearance of supplier stocks ahead of the launch of AI-adapted PCs, which puts some pressure on gross margins. This has been partly offset by a better mix and a continued price discipline. Our cost-saving programs have had positive impact on overall cost, but have been offset by cost inflation and currency effects with a weakened SEC. This I will come back to later in the presentation. So the lower sales combined with the largely fixed cost base has led to negative operational leverage and hence lower segment margins. One in all, the segment margin ended at 2.5% compared to 3.9% last year. And the total segment result ended at 37 million SEK compared to last year, 65 million. Going to page five, we look at the LCP segment. And the sales in the LCP was 4.0 billion SEK in the quarter, up 1.3% year-on-year held by a currency. and the organic growth was minus 0.8%. This is also a sequential growth versus a low Q2. As noted before, we have some volatility between quarters. The public sector was an important driver of the improvement, coming with several new framework agreements, while the performance in large corporates was slower. And from a geographical perspective, SAFE's performance was strongest in Denmark and Norway. Gross margin was slightly declining in the quarter, mainly due to new framework agreements with initially lower margins, Margins was also a bit impacted negatively by country mix. On the opposite, we saw increased share of sales reported on net basis according to IFH 15, which had a positive impact on the gross margin for the quarter. As for these sales, only the gross margin is supported in sales. It becomes 100% gross margin. In addition, we had a sharp increase in take-back, which had a positive impact on margin and EBITDA. Johan will come back to this later in the presentation. Costs were fairly stable, and in total, the segment result was 130 million SEK, which is 141 million SEK last year, and more than ended at 3.3% compared to 3.6% last year. On page six, then, we look at our cost development. A continuous focus on extracting synergies from integrations, together with cost-cutting activities, has improved the cost base, mainly due to reduction in NFTs, which is down 9% from the beginning of the fiscal year 2022-2023, and 5% year-on-year in the quarter. However, cost reduction activities and reduced number of FDs could not fully offset cost inflation and currency fluctuations in the quarter, and the total cost was up 2%. We continue our optimization journey. For example, we are still to capture further synergies from ERP harmonization. And overall, we aim to strike a balance between efficiency activities and being ready for when the market turns. Coming to page seven, we look at networking capital development. And the networking capital improved with over 180 million SEK compared to the same quarter last year, and ended at minus 200 million SEK. So we're back to negative numbers. This was partly driven by inventory, which was reduced by 106 million SEK versus last year, and is now at 925 million SEK. Inventory is now at a balanced and normalized level, where we target to stay for the coming quarters, with some minor improvements up and down, of course. Still able to deliver on our service levels. Both account receivables and payables increased versus last year, mainly related to business volumes. Payables was also impacted by timing of deliveries within specific major customer agreements, where we had favorable payment term timings. Overall, net working capital has bounced back from the high Q2 levels. We always have some timing effects in individual quarters, but our long-term target for net working capital remains to be around minus 100 million. We then moved to cash flow and capex on slide 8 and summarized what we've covered up until now. So despite the low results, cash flow for the period was 340 million SEK. Looking at the details, we see that cash flow from operating activities before change in the trade capital was 81 million SEK compared to last year's 141 million SEK. The difference was mainly driven by higher paid taxes. Cash flow from the change in the trade capital was 373 million SEK compared to last year's 289 million SEK. mainly affected by the change in payables as previously described. And overall, the operating cash flow was $454 million second quarter. Cash flow from investing activities was minus $65 million compared to minus $58 million last year, more than this in just a few seconds. And cash flow from financing activities was minus $49 million, which is flat versus last year. Moving to capex, we see that the total investments in the quarter was $149 million, which was $65 million was affected cash flow. The majority of the 65 was capital related to IT development, mainly the new common IT platform, which is key for our future operational efficiency. Investment in tangible and intangible assets was 78 million SEK, of which only 20 million was affecting cash flow. The non-cash items are mainly lease, contracts, and cars. Investment related to services was 18 million SEK compared to 23 last year, mainly linked to harmonization of data centers, none of it affecting cash flow. And with that, I hand back the word to you, Juan.

Thanks, Julia. Let's move to slide nine. Here we return once again to our take-back business as this is contributing positively to our overall business result. Currently, we are harmonizing the offerings between our countries while at the same time move operational processes into one harmonized system. We're currently on an annual run rate in take-back of approximately 1 million units, and this number is increasing rapidly. The underlying demand is strong, and we see that a good offer in take-back gives us advantages in tenders and large corporate business. We also see that our partners acknowledge what we are doing and support us with approving us for more and more cooperation. Next step on our journey in circularity will be to start selling used and refurbished products to our Nordic and Benelux customers, both the large ones and via the web. All in all, we see strong growth and good margins in our circular offerings at the moment. We then move to slide 10 and some news on sustainability. After the end of the quarter, we have sent in our commitment to join the science-based target initiative. This is an international framework for companies that adapt science-based climate targets to limit global warming. The framework aims to support companies worldwide to achieve net zero emission before 2050. With this application, we maintain our sustainability commitment and are committing to set short-term targets to reduce emission in line with the latest climate science and science-based target initiative. Really positive initiative from us at Dusty. Moving to slide 11 and then a summary of the quarter. As we're summarizing Q3, we can see that the markets as in the last year have continued to be challenging with organic sales down 3.5%. However, we see good progress in winning new tenders in LCP, and the launch of PCs with AI capacity is encouraging. Gross margin at 15.0% is slightly below last year, affected by new contracts in LCP and promotion sales of PCs in SMB, as the market is clearing stock to make room for the PCs with AI capacity. Low volumes and cost inflation affected EBITDA margins that is down from 3.0% to 2.4%, even though we see good progress in capturing synergies and cost focus. Cash flow in the quarter, as we heard, was really strong and showed that we have established our networking capital model also in the Banalax region. And we remain with our focus to be around negative 100 million in networking capital. In regards to the future market, we're encouraged by the release of new pieces enabling AI and the continued improvement in the macro environment in our markets. This leads us to continue to believe that we will see a gradual improvement of the market during 2024. And last but not least, we feel that sending our submission to join the science-based target is the right move for Dustin. And with that, we conclude the formal presentation of the report and we open up for questions.

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Daniel Thorson from ABG Sundal Collier. Please go ahead.

Yes, hi, thank you very much. So a question on the weak margin here in SMB and related to the clean-out trends that you mentioned in the end here and increased promotional levels. Could you say that they are so aggressive right now because everyone knows that we are will have new products in the market quite soon which means that we will have a rapid effect upwards in terms of both not volumes but but sales and also margins as soon as these new products come to the market because the old ones will basically not be able to to sell at all uh in half a year's time or so or how do you see this clean out playing out

I think, I mean, first of all, it's very positive that we see the launch of these new machines. That is clearly something that we have been waiting for. And it shows the commitment, I think, from the manufacturers when they are cleaning the, let's say, the value chain of old products the way they do it now. They really believe in their new launches and the new products. And that is, of course, encouraging. The timing it takes to actually see an effect of that is really hard to predict. But the activities that they are doing now is for sure positive for us.

Yeah. And if you were to estimate or guess on the timing here, I mean, those new products, those new PCs and laptops, I guess we will be able to buy them already in the fall.

You can buy them actually now. I think they will gradually increase in share, obviously, because they are, as you start to understand how good they are, but they are more expensive and more powerful and they will not reach all, let's say, all customers. It will be the premium market, let's say.

Yeah, I see. And then secondly, geographically, do you see any meaningful differences between the markets or countries that are good to be aware of?

From our perspective, I think there is not a big difference in general between the countries. We have an easier in the SMB and the Benelux because we are so small, but that has nothing to do with the market. That's us, basically. And I think on LCP, we have some differences between countries, but that is more on the general tender business from the public sector customers. So no major difference between the countries from a macro perspective.

I see. And then another question on the LCP new contract here and the rollout. Can you share any thoughts on how it will look like in the coming quarters? Is it anything in this quarter we should be aware of, you know, kind of non-recurring positive effects in terms of sales or is this a good level ahead?

It is. We are hunting for quite some new tenders at the moment and it will be a year where A lot of tenders change ownership, let's say. But it's really hard to, let's say, evaluate the first quarter effect of that. Because most of the tenders include kind of a push in the beginning. So let's say the first quarter can be quite big, and then it gets more normalized. I think it will continue to be relatively volatile between the quarters, even though the long-term, let's say, rolling 12 months is much more stable. But between the quarters, it's really hard to predict how much volume will go each time there.

Okay, yeah. Because that was basically my question. In the coming quarters, do you have any visibility that you know that you will have a big rollout? Or the rollout that started in this quarter, will it last for next quarter? Are your visibility also quite low?

Our visibility is low, for sure. Even in LCP, let's say. You could say that the visibility is about four to five weeks, which is the order lead time to China.

Okay, thank you very much.

Thank you.

The next question comes from Jesper Stu Gimo from Handelsbanken. Please go ahead.

Yes, hello and thank you for taking my questions. Just a follow-up on the new framework agreements in the LCP, if you could give us some more flavour there on the margin dilution here in the quarter. I was thinking, is this just an initial thing as we are starting to see the rollout here, or is it more the contract per se that has this lower margin? I was thinking a little bit around your strategy and where you're prioritizing margin over sales growth. So if you could give some color on this. Thanks.

Yeah, a very good question. And I think it is contracts that can give us better margin than the previous ones over time. But as you know, the public contracts is always low margin in the beginning of the contract period. And that will usually have an effect with quite a large volume in the first quarter and then The margin will gradually improve, and then the volumes will normalize, let's say, per quarter after that first push. We don't see any... The contracts we are capturing at the moment, they have the potential to improve margins going forward, but short-term, they will affect it negatively.

Well, that's great. Thank you. And then on the piece of refreshment cycle, if you could give us some comment on what discussions you're having with, for example, from the LCP side here. Do you see that the customers are interested to start to upgrade their computers here during the fall? Or do you think it will be more in the beginning of 2025? conversations?

My feeling at the moment with conversations with customers and looking at market data is that we will see an increased activity during the fall and it will come from I think on SMB mainly macros getting better and then launching of new products in the market and on the LCP side I think it will be mainly on the The upgrade of Windows and the new product launches, because the new product launches will come to some of the employees of the, let's say, large corporate and public customers. But both of these will drive future demand.

Yeah, great. And then just my last question on the cost optimization here and the FD reduction. Is this mainly related to LCP and you will remain a higher cost base in SMB or are you starting to looking over the SMB segment here as well?

It's not only related to LCP, it's on both segments as a start. So we look for cost optimization in all our segments. But as we said, we also want to keep this balance between having the right competence and the right resources when the market turns, because we believe it is very hard to get that competence back once the market has turned.

Great. That was all for me. Thank you.

Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Mikael Leysin from Carnegie Investment Bank. Please go ahead.

Okay, thank you. Good morning. I was just wondering if the campaign situation and clearance is continuing into Q4. How should we think about this?

I think there will be some clearance done in Q4 as well, but not the same magnitude as in Q3. So it's really hard to say at the moment if it has any significant change or impact to say on Q4. But there are some volumes going up also in Q4.

Okay, got it. And also curious about the EBITDA margins or the gross margins on the take-back situation or take-back volumes and the You can also comment on the EBITDA models for software and services.

Just on take back, I would say that we have built the production capacity, which we're now filling with volumes. And volume is coming in to the level of our current. Let's say we are slightly ahead of our own plans when it comes to taking in volumes. we are still not at you know full scale of production for sure not and therefore margins are not where they are supposed to be long term but they are contributing to the let's say EBITDA result at the moment okay and what type of you show the graph with volumes do you need 10% more or do you need a lot more to go yeah I think you need I mean to get to full scale I think we we can we can do that with maybe 20%, 20%, 25% more volumes. But as the more volumes are increasing so rapidly, that can take maybe two or three quarters to get there. But the good thing now compared to a year ago is that we are at least result positive coming from take back already today.

OK.

What about software services? When you grow that, how should we think about the mix effect that could have?

I think software and services will contribute to the EBITDA margin and therefore an increased share there will improve EBITDA margin. As we have said before, on the managed services side, we believe that the margin target is about double compared to hardware. So that will give you somewhere in the round of 10% segment margin. And that is probably a little bit lower when you look at other services than that, but still better than the hardware margin.

Okay, 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 tuning in to the Dustin Q3 report, and we wish you all a very nice summer. Thank you very much. Bye.