Dustin Group AB (publ)

Good morning, everyone, and a warm welcome to the presentation of our second quarter results. My name is Samuel Scott. I'm the group CEO here at Dustin, and with me today, I have our CFO, Julia Lagerqvist. And if we get into the two to 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 mixed effects arising from strong public sector growth and continued price pressure in the Netherlands, also a weak performance within non-standard services that had a negative impact. Adjusted EBITDA was relatively stable at 103 million compared to 110 million a year earlier, where implemented efficiency measures nearly compensated for a lower gross profit. Cash flow from operating activities increased to 258 million compared to 180 million last year, and this is primarily driven by improved net working capital. Leverage measured as net debt to EBITDA dropped to 2.7 times compared to 5.7 times last year, and is now within our target range of two to three times. 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 transformation and efficiency improvements. We have also been re-awarded a Cobadis 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 non-standard 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.

Thank you, Samuel. Moving then to page four, 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, just related to the implementation of the new ERP system in Benelux that led to delayed invoicing. This effect corresponds to around 6% of these points in growth headwind in Q2. As we have said, we have fully exceeded our B2C business quarter, and that drove roughly 2% decline in total sales. And that explains most of the negative impact coming from the decline in the S&B segments. 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 custom orders that were brought forward to mitigate expected price increases or more limited availability related to the global component shortage. All in all, this explains the 4% organic growth in the quarter. We now move to page five to look more closely at the LCP segment. And the sales in LCP was 4.1 billion SEC in the quarter, or 5% higher than last year. The granted growth was 10%, so we continue to see a large negative fourth impact from the state and SEC in the quarter. This growth was then on top of a strong Q last year, as this explains. And the growth was mainly driven then by the demand in the public sector and related mainly to continued PC upgrade and customer orders brought forward. From a geographic perspective, it's a strong growth in Sweden, Norway, and Belgium. We also saw positive development in our lifecycle services, where a strong offering has contributed to a new contract as the secretaries partner in Norway and the Swedish municipality in Kalmar. As 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 the largest share of public customers that normally have lower average margins. In addition, the continued price pressure in the Netherlands was a key driver for lower margins. Increasing take-back had a positive impact on both margin and EBITDA, and we also saw some post-development in our private labor businesses 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 105 million SEC versus 99 million SEC last year, and also improvements versus Q1 results. The segment margin ended at 2.5% in line with last year. Then we move to the overview of the S&D segment on page 6, where sales landed at 1.3 billion SEC, or 14% below last year. Also here, we saw negative works effects, and excluding this, the decline was 11%. We see some signs of stabilization. Customers remained cautious due to the ongoing economic uncertainty. And we in the quarter exited the D3 business in all our markets, which explains more than half of the decline for the S&D segment. Excluding this effect, the organic sales decline was just above 4%. As explained earlier, this is a strategic move to 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 an effect of declining overall sales than an uptick in software and services. We saw continued decline in our non-standard 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 non-standard services with fixed costs. We have implemented cost-saving actions to mitigate these lower margins that we have effected in Q3. The improved cost base from previous cost-saving programs partly protected the segment results, but could not offset the lower volumes and the lower margins in non-standard services. And the segment results landed at 31 million SEC versus 46 million SEC 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 SDV development over time. We have constantly worked with operation efficiency and optimizing of our stores bit by bit. In the last year in Q2, we did a major reorganization with the focus to improve our cost-to-market capabilities, but also to cut costs to match our current market situation. And we removed over 200 O's. Since then, we have continued to reduce our workforce. And as you can see in Q2, we have reduced our total workforce width 226 FTEs, or 10% versus the last quarter, last year. If we prolong the period and look over two 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 non-standard services, so set the defining sales, which was executed at the end of Q2. And we have also initiated further reductions with the aim of saving 80 million SEK yearly, full effect from Q4. so our cost of optimization journey continues in line with our strategic focus. On page 8, we looked at our leverage development. The leverage landed at 2.7 times compared to 5.7 times last year and 3.1 in Q1. We have seen a continuous improvement, driven both by improved results and improved task persistence, as well as in positive forex effects. In addition, we also apply an updated definition of net debt as described in the previous report. which drives 0.2x of a positive effect versus last year. Overall, we are, of course, very 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 172 million sec, which is 89 million sec last year, so a good improvement, also on top of the improvements 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 capital was positive $169 million, despite an increase in inventory. We will look more at the net running capital on the next slide. But in total, the operating cash flow was plus $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 $92 million, of which $39 affected the cash flow. This is mainly linked to IT development investments and slightly lower than last year. Coming then to page 9 and looking at the network and capital development, we see that network and capital landed at minus $46 million. This is an improvement versus last year, $60 million, and also an improvement versus the previous quarter at $139 million. The accounts receivables declined, supported by active actions to set the receivables, and this was the main driver of the improvement in net earning 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, inventory levels were actually declining. We do expect inventory levels to vary in the coming quarters, It's an opportunity to drive sales and margins, 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 a long-term target for national capital remains to be around minus 100 million. And with that, I would hand back the word to Simon.

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 a discontinued consumer business. Gross margin decreased, mainly due to the mixed effects 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 shortage, where we expect prices to continue to increase, and the 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 demand. We also continue 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 80 million SEK, with full effect on the fourth quarter. And in addition, we're now conducting a full review of our indirect spend to further optimize our costs. 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 deliver capabilities. And with that, we open up for Q&A.

If you wish to ask a question, please dial pound key 5 on your telephone keypad To enter the queue, if you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Jesper Stegemo from Handelsbanken. Please go ahead.

Yes, good morning, Samuel and Julia. Can you hear me?

Yes.

Yes, okay, great. So I have a follow up on the memory prices topic, supply shortages, etc. How has that impacted the volumes here in Q2, LCP versus SMB? I guess LCP customers are 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 bonus. We do see that kind of demand has flattened out significantly. 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 you being squeezed when prices increases, i.e. that you have pieces in your inventory already sold, not yet delivered, but then you have these 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 collaboration 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, you know, especially pieces 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. Thank you. 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 a 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?

Thank you. Well, I can start. And if we start with the last question, that's not the 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 from a market and price pressure point of view is 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 buyers 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, you know local management and local focused sales organization but then it's it's also about growing in in the private sector and and growing with our services, such as take back and lifecycle services. But that's a journey that will take some time, but that's a journey we have started. All right. Thank you for that.

Good luck in Q3S. Thank you.

The next question comes from Michael from DND Carnegie. Please go ahead.

Okay. Thanks. I have a question on the cost savings that you have initiated, 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 80 million we announced, that is headcounts, 100% coming from headcounts, and we expect it 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 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 this go to the modules?

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 non-standard services here a bit. That part is weak or underperforming. Could you explain how much of your services revenue is non-standardized and standardized and the different profitability levels maybe and the revenue trajectory and what you're doing in these different areas?

I think we can say it like this. From a revenue point of view, the non-standard 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 of our business and that's where our future lies. So what we're doing now is step-by-step taking down costs, but in parallel also looking if we can accelerate that transformation journey to eventually completely get out of the non-standard business.

If I can't add, I mean, we're also seeing that some of these clusters are churning, right? So there is also going to be a bit of a continued loss of sales that we're basically mitigating with cost cuts.

Okay, got it. Thanks. And the final one on the LCT side. Just wondering if you can comment on the maturity profile of your current LCT 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. We always have a mix. of incoming and outgoing and rewins of contracts. So this is something that this is reality we live with every quarter.

So what is it so 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, if you would normalize this.

Yeah, sorry, but if we look back a couple of quarters, we've 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 now it's more in the balance as it usually is. So nothing exceptional.

Okay, great to know. And 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 essentially was in the quarter?

It's hard to give an exact estimate of how much orders we actually put forward. We always had a bit of movement between the quarters, but if I would give a number, I would say it can account for up to 4% actually of orders being moved forward, around 200 million in sales.

Okay, great. Thanks a lot.

You're welcome. The next question comes from Daniel Thorsen from ABG Sindal Collier. Please go ahead.

Yes, thank you very much. A question on the public sector pre-buying 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, you know, the larger ones being the earliest to act and realize the market situation. So that's where it started, of course. But it's a dialogue that is happening across all markets.

Okay, and a link 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? Is there any meaningful difference?

In percentage points, I wouldn't say it's any meaningful difference. Of course, when the price goes up, the actual margin can go up also, but in

exactly the profit but in percentage points i wouldn't say that it's any big difference okay okay i see that that's clear and then on smv growth when will the btc discontinuation fade on like comparable numbers 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 three quarters.

We basically exited everything in December, mid-December.

Will it be similar magnitude of the impact, or like on a year-on-year basis here, you say around four or five percentage points, or even six? Is that what we should expect within the S&B ad?

I mean, the SMB business doesn't have a large cyclicality, so you can assume that it has been similar size over the year, I would say. Without having the numbers in front of me, to be very honest, but that would be my estimate at this point.

Yeah, nicely, that's clear. But I'm also linked to the question regarding reinvesting these annual savings. I mean, it's a balance between margins and bottom line and the 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 target that we have set now is the one that we have and the targets are set by the board. Until then, these are targets that we are living with and we are trying to obviously Get closer to as much as you can, but it's a long journey. I don't know if you want to add anything, Samuel.

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

Yeah, 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 too. So just to get a comment on that or 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.

Clear. Thank you very much.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Thomas Nielsen from Nordia. Please go ahead.

Thank you very much for taking my question. It's encouraging to see your balance sheet is now 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, potential share buybacks, and many opportunities?

Our current policy obviously stands with a 70% dividend payout out of net income. And 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 from my part. You saw a negative mix effect on the gross margin in Q2. What kind of mix effects 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, you know, quarter to 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 you said, the main mixed effect is the move of increased sales to public where we have lower margins and sales declining in the S&B segment where we normally have higher margins. We've seen that trend in the previous quarter as well. But let's see where we are. And obviously, we don't have a guide for the future. So it depends on how the future will develop for us.

Okay. Thank you very much.

Thank you. 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 done. 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.