Bechtle AG (BC8) Earnings Call Transcript

Ladies and gentlemen, a very warm welcome to the Bechtle AG's conference call. The session is being recorded. [Operator Instructions] Now I'd like to turn the conference over to Dr. Thomas Olemotz.

Yes, thank you very much, and welcome to our press and analyst conference for the Bechtle AG second quarter and first half of 2026. I'm very delighted by your interest shown in our conference call. Certainly, you've all seen our ad hoc announcement of July 28, in which we already announced the key figures for our operational performance in the second quarter and, in particular, an increase in our guidance. Today, we would like to take a closer look and analyze this very positive development in greater depth. Because I would like to say something upfront, the framework conditions have not improved. They remain challenging. Despite these challenging conditions, Bechtle has performed very positively. We have a traditional proximity to our customers and a close partnership with all relevant technology vendors, and this is paying off. Our business model is broadly diversified geographically and also across customer groups in our portfolio, and this contributes to our success that we would like to talk about today. Let us have a look at our agenda. We have 3 main sections. We're going to start with an intense more detailed look at our business performance and development and the key figures of the second quarter of the current fiscal year and also the first half of this year. And this will be presented to you by my colleague, Christian Jehle. The second part is going to cover the latest news and current updates on important strategic events and topics, so to speak, that go beyond the actual figures, but that are highly relevant for our future business development. Then, of course, we will have an outlook on the second half of this fiscal year and also put the guidance raise into context and the aims that we pursue and how we actually look at the next 6 months to come. But now let's turn to business performance. Mr. Jehle, the floor is yours.

Thank you, Dr. Olemotz. Well, Q2 saw double-digit year-on-year growth in almost all relevant key performance indicators. This shows that Bechtle continues to manage the storage crisis very successfully. The customers still have a very high demand for consultancy and support discussions and the encouraging performance is broadly supported across all customer segments and also across all regions. And we've also been successful in terms of cost management. And as a result, gross margin and EBT margin remained stable. Let's first take a look at the trend in our order intake and order backlog. Order intake increased by 26%. This means that the demand remains to be high, and we've been able to further expand our order backlog. So Bechtle is not living off its reserves but has benefited significantly from high demand. A high order backlog gives us greater certainty also looking ahead to the current quarter. The reasons for the high order backlog are twofold. Well, on the one hand, we have longer delivery times for certain hardware products, in particular, servers and storage. And the project start-up sometimes takes longer due to the need for discussions regarding increased prices or the allocation of the available IT budget. Let's now look at our top line performance. Business volume rose by 18%. Organic growth was also very strong at 13%. And part of the growth was driven by higher hardware prices, and sales also performed well, driven by a higher proportion of hardware. Nevertheless, Software has also recorded consistently high growth and organic sales increased by 10%. So overall, a very strong performance from Bechtle at top line. Let's now look at the performance over the course of the year. If you look at the 2 quarters, we can see that momentum picked up in the second quarter, but price effects are also playing a role here. June, in particular, was very strong. Discussions with customers to initiate projects are currently rather long drawn out compared to the past, though some were successfully concluded in June. For the first half of the year, business volume stands at 15 -- has an increase of 15.6%, which is well above the previous forecast and one of the reasons for the upward revision of our forecast. So as we've communicated in March of the first quarter and after the second quarter, we have positive proof points for our positive business development. Let's now look at the development in the segment. I think the most important thing you can see here that all segments, all segments inclusively contributed to growth with double-digit figures. So we have a very sound and broad basis. It's not driven by individual segments. France continues to perform well, albeit at a lower level. And Other Europe, we see a key growth driver at 51%. This includes growth from M&A in Spain, Italy and Portugal. But we also see a strong organic growth at 22%. And the good news here is, as I've said before, growth is broadly supported by all customer segments and all regions, which is a clear indication of a sustainable trend. And I'm sure you followed the press releases and if you look at the growth of our competitors, the smaller and the bigger ones and if you focus on Germany, well, we can safely say that we have gained market share, above all, in the first quarter. This brings us to the earnings performance. If you look at earnings, we can see that gross margin remains at a high level. So we are still able to manage the current difficult situation effectively. And Dr. Olemotz has mentioned the difficult situation. Cost of materials show a slightly disproportionate increase, but gross margin remains at a high level. And this, of course, reflects our successful cost management. Let's look at the trend in operating profit. EBT is also seeing double-digit growth in the second quarter by 20%, which means that the first half year increase is 16%, which is well above our previous expectations, further reasons for the forecast upgrade. The stable gross margin is the basis, but cost management measures are also having a positive impact. So in a nutshell, the positive message here is the EBT margin remains stable. Now let's look at the different segments. Here too, growth is broad-based with all segments showing strong growth. So particularly strong in the segment Other Europe. This is not only driven by acquisitions, but also a very good result in existing units and great synergies between existing and new units and the cooperation with the headquarters is also great. A case in point is the Iberian Peninsula and was also encouraging. Germany is largely maintaining high profit margins. And so, to conclude our review of the key figures, let's take a look at operating cash flow. Operating cash flow was under pressure in Q2. The reasons are obvious. Operating cash flow reflects our strong operational performance. And as I've said before, June, in particular, was very strong. Hence, significant effects relating to the reporting date. On the one hand, order-related inventories rose and on the other hand, contract assets also increased. That's related to the reporting dates, and I'm sure you all understand this. So here, we see the development of the business in the second quarter, in particular. Structurally speaking, the picture is positive. If you look at our DSO performance, this has improved from 39 to 37 days. And also working capital sees an improvement. Despite an absolute increase, the relation to business volume has improved from 7.3% to 6.8%. So all in all, we are fully confident of and assume a positive trend in OCF for the financial year 2026. So let's look at our employees now. Headcount growth is exclusively driven by acquisitions. In organic terms, we see a decline by 1.4%. And over the year, we see a drop from Q1 to Q2. So we continue to make a conscious decision to adopt a measured approach to new recruitment as part of our cost management strategy. So we see positive development and are very conscious here. Let us now turn, as discussed, to look at our nonfinancial special events. I shall hand back to Dr. Thomas Olemotz.

Thank you, Christian. The following selected current updates show examples, just examples that contribute to our sustainable and profitable growth. We will have a look at a successful acquisition, 3 important milestones in our AI activities. A sales success in our public sector business, a very successful capital markets transaction, and last but not least, another step in implementing our sustainability strategy. Let us start with M&A. With the acquisition of Interforce that we've already announced, we are once again expanding our market presence in the Netherlands. Interforce is one of the established managed service provider for medium-sized companies in the Netherlands and employs 38 people. Interforce's business model is based on a high degree of automation, and this explains the relatively low number of employees, and it focuses on integrated cloud and managed service solutions for small and medium-sized customers. With this acquisition, we strengthen our own managed service offering portfolio, further increase our share of recurring revenue and we gain an experienced team with strong technological expertise. Our plan is to bring Interforce's standardized solution also to other European country markets in the future. Let us now focus on 3 particular success stories in our AI business. First, we are expanding our cooperation with NVIDIA. And this strengthens our position as a provider of AI infrastructure. We're achieving the highest partner level with NVIDIA. And this confirms Bechtle's comprehensive expertise in designing, deploying and scaling high-performance AI solutions. Second, together with Dell and yes, NVIDIA, again, we're also opening a central Dell AI factory which will include the demonstration and proof of concept environment as well as a competence center for consulting and workshops. The aim is to help customers with validated reference architectures to bring AI into productive use more quickly. A remarkable success has also been achieved by our subsidiary, Planet AI. This is our AI research and development company, and it has won the world's most demanding competition for document-based AI systems. Planet AI came in first, both in the overall ranking, but also in 7 out of 8 competition categories, quite impressive. Let us now have a look at our public sector business, ladies and gentlemen. In the second half of the year, this will be especially critical for our business performance. Bechtle has been awarded the contract by the Bavarian State Ministry of Justice for the operation and further development of central IT services. The framework agreement centers on the operation of the central biotech IT platform. This is essential for digital workplaces and IT services for the Bavarian Justice systems. Managed Services, project and consulting services and provision of IT hardware are included in this framework agreement. The contract commences on January 1, 2027 and has an initial term of 6 years. The maximum contract volume amounts up to EUR 250 million. This project also includes the support of 2 data centers and 220 locations in Bavaria with a total of more than 17,500 IT workplaces. This is a long-term contract. And through this, Bechtle will support the courts and public prosecutor's offices in Bavaria to further advance digitalization and providing employees with a secure modern and high-performance IT working environment. But also on the capital market, as already announced, we've been quite successful. In May and June this year, we successfully placed our second promissory note transaction since 2018. The demand was very high. So the originally target volume of EUR 250 million was increased to EUR 450 million. The order book was oversubscribed several times and was closed early for new orders. In the final, the binding phase, the order book was approximately 3.5x the original target volume. A total of 84 domestic and international investors participated in the transaction. The promissory note bonds have maturities of 3, 5 and 7 years in 6 clusters. This is how they were issued. And with this transaction, we're optimizing the maturity profile of our financing structure, and we're strengthening the company's long-term financing, particularly with regard to our M&A strategy. Last but not least, let us have a look at some progress with regard to our sustainability strategy. Bechtle AG has joined the Responsible Business Alliance as an affiliate member. This supports the vision and objectives of one of the world's largest industry initiatives for promoting social, environmental and ethical standards in global supply chains with a focus on electronics and IT industry. By joining this alliance, we commit to progressively implementing the code of conduct of Responsible Business Alliance in our own business processes and also involving our direct suppliers in compliance with these requirements. Joining this alliance reinforces Bechtle's Sustainability Strategy 2030 and the corresponding ESG objectives. Ladies and gentlemen, let us now turn to the outlook for the remaining months of this year. As I already said, the second quarter was very positive and significantly exceeded our own expectations. It is quite remarkable how well we've been able to navigate these difficult challenging framework conditions in the IT market. And let me emphasize again, these conditions are and remain challenging. They have not changed. I would also like to remind you that the GDP growth forecast for the European Union in Germany have been revised downward as well as the growth expectations for the IT markets in Germany and France. However, the first half of this year was extremely successful. We have a record order backlog ahead of us. So we look confidently towards the second half of this year. So what does that mean specifically for our outlook? We are raising our guidance from March 2026, our forecast. The demand for future-proof IT solutions and the corresponding consulting services remains high, and our proximity to customers is a major asset here. And the public sector, we expect a seasonal pattern and further positive momentum in the second half of the year. We know that in the second half of the year and particularly in the fourth quarter, we are facing very high comparative figures. Nevertheless, we are convinced that we can maintain our successful course. For the overall fiscal year, we expect a business volume growth of more than 10% in revenue and EBT growth in the range of 5% to 10%. The EBT margin is expected to decline slightly, mainly due to investments in our own IT infrastructure. Ladies and gentlemen, this concludes the review of our performance in the second quarter and first half of 2026, and our outlook for the remainder of the fiscal year 2026. Thank you very much for your attention. And now I'm happy to take any of your questions.

[Operator Instructions] We start with a question from the German room. The first question comes from Andreas Wolf, Berenberg.

Yes. Great. Congrats to this strong quarter. Three questions. The first, organic growth in the second quarter was double digits, very strong. But the organic development of employee development was flat. What are the cost expectations here? So the ratio of hardware prices to your revenue development. Can you comment on that? And the third question refers to the public sector. You see new tenders due to the increase in hardware prices?

Thank you, Mr. Wolf for the questions. Let me start and then my colleagues will add details. As regards to organic growth, indeed, the second quarter was extremely strong, and you've seen it, we had a close tab on the cost. That is why we don't expect significant cost increases for the remainder of the year. If we show an increase in employee costs, that's due to the variable part of the remuneration and the provisions necessary for that. If we continue the same performance throughout the remainder of the year, then, of course, our sales colleagues will want to have a share in that. And we have the provision on a monthly basis, and that might mean that for the back end of the year, employee costs will increase. We don't assume, however, that we'll see an organic increase in headcount for the remainder of the year. If the number of FTEs increase, then that's only due to acquisitions like in the first half of the year. And the second was, of course, if we deconstruct growth, there are 2 essential effects, volume growth and price growth. Well, more than 50% of our growth is driven by price effects. However, you can't distribute it equally across all product groups. There are certain product groups where we grow both in terms of volume and price. And there are other product groups above all where the shortage is biggest where we see tremendous price increases and we expect further in the back end of the year. And what's really strange about the situation, we have other product groups where prices drop. So we have a rather complex situation, if you look at the price development at product level, something we haven't had like before. Usually, these effects are in line during these phases. And the reason why this is different this time is simply due to the supply chain restrictions, which is different across the different product groups. But the price effect is an essential driver here. As regards to the development of the public business, we generally report about tender we won once they exceed a certain level. I've already mentioned it in my explanations for us. The development in the public sector business sees a usual seasonality. And I mean, you've been following us for years or even decades, so you are aware of the seasonality in the public sector. And that's decisive for the performance of the second half year. We expect this to continue. The public sector business in Germany and abroad has developed solidly. We didn't expect more for the first half year. And for the second half year, we expect growth rates to increase, above all, in the fourth quarter. And we need this because you know that year-on-year, we have a very strong effect, above all, in December because -- but from today's point of view, there are no reasons to doubt that the momentum will continue towards the end of the year. And the tender volumes don't drop significantly. So our public sector customers don't respond to the price increases by tendering less volumes. We don't see this. Of course, the structure changes slightly and the customers need to be flexible in terms of manufacturers, some produce more, others less, but that's just the usual fluctuations we see here. So we don't see any special effects for the second half of the year, and that is why we are rather bullish in the assessment of the development.

Next question, Florian Treisch, Kepler Cheuvreux.

One question regarding the nonpublic sector. I mean, you've clearly indicated that Germany and the public sector are successful here. But if we look at the H1 figures, the nonpublic sector dropped year-on-year in terms of revenue. Was Q2 better than Q1? And do you expect a recovery in H2? And the second question refers to pricing. If you look at the guidance, 5% to 10% revenue, and you said more than 50% and is driven by pricing. And you also said that the pricing continued to increase. Is that ambitious to look at the lower end of the new guidance? Or is 10% or even more to expect it because we see this tailwind by the prices.

Dear Mr. Treisch, that's how I'd like to start my answer. I would have been surprised if you had not asked this question because we know each other quite well. I mean we know each other really well. Is our guidance too conservative? Yes or no? Please think back 3 months and think back and recall the discussions we had back then. We've said right from the start, and with hindsight, we see the development as a confirmation to be rather conservative due to the high level of uncertainty. And that is why we've been revising our guidance in shorter distances. So we do this on a monthly basis, not quarter-by-quarter. That is due to the fact that the order backlog is at a historic high. However, there are certain reference values that are still lacking. Regarding how order backlog translates into actuals because we still expect disturbances in the supply chains with longer delivery times. And at the end of the day, if you want to invoice a specific project, which consists of several components in terms of hardware. It depends on the deliverability of individual products. So it's no good if in some product groups, there's less pressure. But in terms of storage, the pressure remains unchanged and high because storage is part of any project we have once it exceeds a certain size. And in terms of guidance, this means that we looked at this very carefully. I mean we've been blamed for being too conservative at the beginning of the year, but with a view of the development, we can explain why this was the case. And the framework conditions haven't changed in the back end of the year. Apart from the fact that the first vendors who commit to certain delivery times, that's not generally the case, but individual vendors do that and for tactical reasons, I'm not giving you any names here. So that is why we are fairly confident that as regards to the top line development, we are quite confident that we achieve our targets. And the first question, the development of the nonpublic sector. You're absolutely right. Q1 was rather hard, but you have to make a distinction between SMEs and corporate business. In the second quarter, the industrial customers have developed better. But we still see, and I don't want to hide this, we have difficult situation in our own industry, and we have a different demand situation in the classical SME, which still accounts for almost 50% of our business. Right now, we are compensating this quite successfully by our corporate business with individual big customers and with the public sector business. If in the second half year due to the economic development, which shows some slight improvement, so we see a change here, then we will have to especially relevant towards the end of the year.

Next question by Martin Jungfleisch, BNP Paribas.

I do have a question on customers' reactions to the hardware price increase. The order intake and business performance. Is this driven by pull-ins? And will this have effects in -- for the second half of the year? Or do you also expect a strong order intake in the second half of the year as well? And how do the customers change their procurement behavior with regard to critical and noncritical infrastructure? And what do you expect to happen whether the customers even adapt their budgets for 2027 with regard to the higher prices?

The first point, customer response. Well, we see customers that put everything on hold. And the other customers that go through this process step by step and are rather careful. What you say is practically what I intended to say, there is an uncertainty. Yes, we do have quite a high order backlog, historic high. But how this translates into top line growth might not be at an equal level. And this is exactly what you're referring to. So what does that mean? It might be that individual customers might place several orders with different providers. This is what we've seen during COVID. Customers can place orders that are nonbinding and can cancel them depending on their own economic development and the industrial development. So the order backlog might be high, but the delivery times might also be pushed into the future. So this could translate into effect on to the materialization into top line growth. So this might be quite significant. And this is why we cannot say everything that we have got with a certain deadline can be materialized in this fiscal year. However, we do not expect a decline in order intake. Since the end of the second quarter, we see a positive development for July. We can confirm this already. And the third quarter will most likely see positive values, we started positively, just as we ended the first half of the year. So we do not see any weak signals into this direction or that direction, which might lead to a totally different investment behavior in the second half of the year. How do the customers respond to higher prices? Well, most of our customers regardless of us having framework agreements with them or project-related agreements. They, of course, do not have endless options to expand their own budget. At the same time, we're not seeing any reductions either because there is a necessity of investment in the platform services and IT infrastructure. This demand remains high. You know the buzzwords, and we've mentioned them time and again in our quarterly reports, we need increased storage capacity and computing capacity due to AI, edge computing. The CPU and storage volume needs to be increased. But on the cost on the user side. So these are structural trends that have not changed. And this is why most of the customers use the existing budget and reallocate their spending according to the prices. So some vendors might be taken into consideration that were off their chart in the past because now the vendor can actually provide them and with the equipment and didn't raise the prices significantly or maybe some projects are pushed to the back burner. We do not know. However, the investment budget remains the same, but still remains a potential market for us, and this is how we look at the current customer side of the market.

The next question by Martin Comtesse by Jefferies.

I would like to ask several questions. Number one, incremental EBIT in the Other Europe segment, we see EUR 10 million year-over-year. Could you shed some more light on to this, how much comes from acquisitions because this seems to be a highly profitable business that you acquired. And what do you expect for the second half of the year? This is question number one. Question number two, the cash flow figures. Can you give us some more details? Strong June, what is its impact on the cash flow or the belated project implementation, so we can sort of get an impression of -- for the development of the third quarter.

My colleague might add some more details on the cash flow because when we look at it superficially, this is actually the only flaw in our figures of the second quarter. We also announced in the press release, also in the quarter's report. Cash flow actually, doesn't worry us in the long run. And I'm not saying this against the backdrop that the promissory note bonds, which actually puts us in a quite comfortable position. Christian Jehle already said it, we see an improvement in the DSO. So what's the underlying message? We're actively managing or quite aggressively managing our cash flow and the capital. What is this cash flow and capital increase been about? Well, we have the project bound inventory and they increase, but this doesn't mean any risk with regard to depreciations because we have specific projects backing this up. And to do this in these times is only possible for companies that are very well financially set up because we do have a buffer. And we have longer delivery times for individual components and projects, but we can buffer this. This can lead to the fact that at the deadlines, and yes, it's been the case for a couple of projects that network components and notebooks that were in our inventory for specific customer projects, but the project hadn't started. Maybe the docking station couldn't be procured. And in such a case, in such a scenario, we can put this into our balance sheet, but it doesn't entail a depreciation risk, but it gives us the possibility to show to our customers where the added value is when cooperating with Bechtle because our competitors -- some of our competitors do not have this room for maneuver. We have this room for maneuver because we have a sound balance sheet. This is what I wanted to say upfront when it comes to the underlying mechanisms for cash flow. And Christian Jehle said that we can be quite optimistic that we will see an improvement in the situation by the end of the year because we have special effects, deadline-related special effects that sort of had this negative impact on cash flow.