Dustin Group AB (publ) (DUST) Earnings Call Transcript

Welcome to the Dustin Q1 presentation for 2024-2025. [Operator Instructions] Now I will hand the conference over to the CEO, Johan Karlsson; and CFO, Julia Lagerqvist. Please begin your meeting.

Good morning, everyone, and welcome to this Q1 presentation from Dustin Group. As you heard, my name is Johan Karlsson. I am the CEO. And with me in the room is also Julia Lagerqvist, CFO; and also Fredrik Satterstrom, Head of IR. But let's kick it off and move to Slide 2 and Dustin at a glance. So Dustin is an IT reseller with its space 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 have in the last years become a larger share of total sales, and hence, increasing in importance. Our assortment is primarily sold online and 60% of sales go through the 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 and the new IT platform in the Benelux, and the aim is that we move to similar share as in the Nordics in the coming years. We are present in 6 markets in Europe with our main markets being the Netherlands and Sweden. And as you can see, our key customer focus is business-to-business, representing 98% of our sales. With that short introduction to Dustin, let's move to the quarter on Slide 3. As in the last quarter, sales was affected by a weak market with continued general cautiousness by the customers in many of our customer groups. Further to that, the implementation of a new IT platform in the Benelux affected sales in the quarter. Sales in the quarter was SEK 4.782 billion or 17.5% below last year. In SMB, organic growth was negative 8.2%, while LCP was down by 19.5%. LCP was mainly affected by restrictions in public sector budgets in some of our markets and by the implementation of the new IT platform in Benelux. Gross profit at SEK 683 million was down from -- by SEK 205 million or 24%, while gross margin ended at 14.3%, down from last year's 15.3%, but up from Q4's SEK 12.9 million. A shift in the product mix in LCP and new public contracts in LCP had negative effects on gross margin, while the gross margin in SMB remained stable. Adjusted EBITA at SEK 21 million compared to last year's SEK 192 million with an EBITDA margin down from last year's 3.3% to 0.4%, mainly as a result of the lower volumes in both SMB and LCP. Items affecting comparability was at SEK 10 million compared to last year's SEK 17 million and was mainly related to the changes in the organization. EBIT was at negative SEK 52 million compared to last year's SEK 129 million. Cash flow from operating activities ended at negative SEK 42 million compared to last year's SEK 250 million, mainly coming from low business results and higher working capital. Leverage ended at 5.4x compared to last year's 4.0x with the main effect being the lower business result. Some of the highlights from the quarter were that we introduced changes in the organization to realign costs and create efficiency, and the work there has carried on in line with what we have planned for to give a saving of SEK 150 million to SEK 200 million. And that we -- the other items from the quarter will be the implementation of the shared IT platform in the Benelux that will generate efficiency gains going forward. If we move to Slide 4 and look at sales performance broken down a little bit more in detail, so we can see that the continued cuts in public spending, primarily in Finland and lower demand among our larger companies due to postponed investment decisions impacted sales within LCP by roughly SEK 400 million. Challenges in the implementation of the new IT platform impacted sales with roughly the same amount or SEK 400 million for the quarter. The negative effect of the new IT platform decreased throughout the quarter, as you can see in the graph, and sales picked up at the end when a large part of the backlog was shipped and invoiced. The challenges experienced have been addressed, and no significant operational impact is expected in the second quarter. In SMB, we saw continued cautious market where investment decisions were impacted by cost-cutting measures, and thus, delaying investment decisions. Now we'll have a look at the result effect coming from this sales in the quarter, and Julia will take you through that.

Thank you, Johan. Yes, building on the volume update you had saw, we look at Page 5, what is driving this weak adjusted EBITDA development in the quarter compared to last year. Last year, we had an adjusted EBITA of SEK 192 million. As Johan said, SMB has still been affected by a cautious market with lower volumes, and this impacted the result by minus SEK 28 million compared to last year. But the biggest impact comes from the lower LCP volumes, minus SEK 107 million due to the large drop in sales versus last year, as Johan talked about. The challenges from the IT platform implementation accounted for roughly half of the drop while market challenges with budgetary cuts and postponed investments accounted for the other half. We also saw a negative gross margin development in SMB due to larger share of sales with the new framework agreements with initially lower margin as we saw in the previous quarter and also an unfavorable product mix, which had a negative impact on adjusted EBITDA. This was somewhat offset by overall SG&A declining slightly, with cost savings more than compensated for cost inflation and temporary costs related to the IT platform implementation. All in all, this led to a total drop of SEK 171 million in adjusted EBITDA versus last year down to SEK 21 million in Q1. The work with implementing the new organization and further efficiency measures is, as Johan said, going according to plan. It's expected to have some positive impact in Q2 and then further impact in Q3 in the coming quarters. Majority of the estimated costs associated with the reorganization is expected to be taken in Q2. We then move to the overview of the SMB segment on Page 6, where sales landed at SEK 1.5 billion, minus 1.2% less versus last year. And the organic growth was minus 8.2%. As already mentioned, the continued economic uncertainty is still affecting demand in all markets. As in previous quarters, we saw low demand for computer and mobile phones, while the share of software and services sales increased somewhat due to a positive trend for contracted recurring services in the Nordics. Gross margin was stable in the quarter, supported by continued price discipline. However, the lower sales volume led to lower segment results, even though it was somewhat protected by slightly lower cost base, which also supported segment margin. All in all, the segment margin ended at 3.2% compared to 3.6% last year. The total segment result was at SEK 50 million compared to last year's SEK 61 million. This is still an improvement versus the previous quarter, both on result and margin. Going to Page 7, we look at the LCP segment. The sales in LCP was SEK 3.2 billion in the quarter, down 20.9% year-on-year, and organic growth was minus 19.5%. As already shared, the sales was impacted by continued budgetary cuts affecting public customers. This impacted mainly Finland. Postponed investment decisions are affecting demand and the challenges to the IT implementation of the new IT platform impacted mainly the Benelux. On the opposite, we saw a positive sales performance in Sweden, Norway and Denmark. And overall, we still see a large volatility in sales between quarters. The low volumes obviously had a large impact on gross profit. And in addition, the gross margin dropped driven by, as I said, a high share of new framework agreements with initially lower margin and a negative product mix, which had further negative impact on the results. We also had some increased costs related to the implementation of the new IT platform. But overall, total cost declined somewhat due to already implemented efficiency measures. And we continue to see an increase in take-back, which had a positive impact on margin EBITDA. Johan will come back to this later during the presentation. Overall, this led to a segment result of SEK 11 million versus SEK 162 million last year, and margin ended at 0.3% compared to 4.0% last year. Moving on to the cash flow and CapEx on Slide 8. We see that the cash flow for the period was minus SEK 104 million. Looking at details, we see that the cash flow from operating activities before change in working capital was plus SEK 20 million compared to last year's SEK 108 million. The difference is mainly driven by the lower operational results. Cash flow from change in net working capital was minus SEK 62 million compared to last year's plus SEK 140 million, mainly affected by lower-than-expected sales and the timing of sales. We look more at net working capital on the next slide. In total, operating cash flow was minus SEK 42 million for the quarter. Cash flow from investing activities was minus SEK 45 million compared to minus SEK 70 million last year. More on this in just a few seconds. And the cash flow from financing activities was minus SEK 62 million compared to minus SEK 51 million last year. Moving to CapEx. The total investment in the quarter was SEK 73 million, of which SEK 45 million affected cash flow. This was lower than the previous year. The majority of the SEK 45 million in CapEx was related to IT development, mainly the new common platform; however, lower in this quarter than previous quarters as we've now gone live in the first part. Investments in tangible and intangible assets was SEK 29 million this year, of which only SEK 16 million affected cash flow. The noncash items are mainly lease contracts. Investments related to services was SEK 16 million compared to SEK 24 million last year, mainly linked to harmonization of data centers, none of it affecting cash flow. If we go to Page 9, we look then at the net working capital developments. Net working capital landed at SEK 267 million, which was higher than both last year at minus SEK 261 million and also an increase versus the previous quarter, which was at SEK 170 million. This is far above our targeted level and mainly driven by 2 things. We had higher inventory levels due to lower sales than expected in the Benelux. We do expect the inventory to come down to a more balanced and normalized level in the coming quarter, still able to deliver on our service levels. Account receivables increased mainly due to a high level of sales at the end of the quarter. Accounts payable was fairly flat, while other payables increased due to goods received but not invoiced yet. Overall, we had high net working capital driven then to a large extent by the implementation of the new IT platform in Benelux, and we do expect it to come down in the coming quarter. As said before, we always have some timing effects in individual quarters, but our long-term target for net working capital remains to be around minus SEK 100 million. If you look at our leverage, we landed at high 5.4% in the quarter, driven mainly by the poor EBITDA development, but also the high net working capital. Had we been at our target level for net working capital, leverage would have been at around 4.8%. We have a continued ongoing good dialogue with our banks. And during the quarter, we adjusted the financial terms of the bank agreement to reflect the current market conditions. And with that, I hand back the word to Johan.

Yes. And then let's move to Slide 10 and have a look at the circularity offering in take-back. Our offering in circularity continues to deliver strong growth, and we're currently on approximately 1.2 million units of take-back on a yearly basis. Our 2 take-back centers in Sweden and the Netherlands operate with better and better efficiency and the volumes -- as the volumes are increasing. We see strong demand from customers, and the offerings give us advantages in -- primarily in public tenders. The high volumes have also resulted in better efficiency and positive operating margin in recent quarters. Next steps will be to sell refurbished products online and add more value-added offerings around circularity. In this development, we see LCP customers leading the way with their own sustainability agendas, and therefore, strong demands. And we believe that Dustin is well equipped to take care of the larger customers' demand in this area. With that said, we are moving to Slide 11 and the summary of the quarter. In summary, Q1 was a challenging quarter where declining sales coming from a continued cautious market and the implementation of a new IT platform affected the result. Gross margins were down from 15.3% to 14.3%, mainly due to the product mix in LCP and higher share of new frame agreements. In SMB, gross margins remained at last year's levels. EBITDA margin of 0.4% was down from last year's 3.3%, mainly as a result of the low sales volumes in both SMB and LCP and the weaker gross margin in LCP. Some of the highlights from the quarter where the organization changes and efficiency measures are developing in line with plan and expected to reduce cost by SEK 150 million to SEK 200 million annually and make Dustin stronger to meet future market recovery. The implementation of the shared IT platform in Benelux will lead us to improved efficiency and customer experience. After some initial challenges, we -- no significant operational impact is expected in the second quarter. Despite the tough market currently, we, together with leading market institutes, believe that the market in 2025 will come back to growth, fueled by the underlying demand factors such as AI PCs, post-pandemic replacement cycles and the phasing out of Windows 10. And with that, we conclude the formal part of the presentation and open up for Q&A.

[Operator Instructions] The next question comes from Jesper Stugemo from Handelsbanken.

2 questions from me if I may. So I was wondering around the implication on your business from Microsoft changes in the incentive program from January 1, 2025, where it looks like they will do a cutback on commissions for traditional enterprise license agreements to promote sort of more cloud and security solutions. So on your roughly 20% sales from software and services, how do you think this will impact your business? And will this be a potential drag on the margins this year?

We don't believe that it will be a drag on the margin. It will, however, require a change in how we address customers, which we have known for a long time and has actually initiated these changes along the way. So we don't believe it has any significant impact on the ability to make margin, and it's definitely in line with what we are already doing.

All right. And on the buildup in inventory levels there, mainly in the Netherlands, do you -- should we expect a large outflow here in Q2? Or how should we think of the working capital in near term?

I mean, as said, we do expect it to return to more normalized level already in Q2. This was a bit of a hiccup in this current quarter also with inventory levels, as obviously, we buy inventory a little bit ahead of time, and then, the sales didn't come in as expected.

All right. And then just last one for me on the refurbished online sales. That is the next step. You said, what kind of margin do you have on these refurbished, for example, PC sales? And will you pre-install them with Windows 11 before it's shipped? Or what's the demand for refurbished PCs you think?

I think we do that business in kind of different -- you can do it in different ways. So we do part of it. We buy it back, and we sell it through brokers, basically just sell it. And we don't -- we just clean them up and refurbish them a little bit to get a better price. And then we have other customers where we are doing more continuous, let's say, prolonging the lifetime of a PC together with one customer, then the fleet of the PCs are staying with that customer, but for a longer time. And then we address that with, let's say, either we change part of the -- parts within the PC in order to make lifetime longer or we take them back and clean them and give them to a new user in the same company. So it's a little bit different how in the different formats. And in general, I would say the margin in percent is significantly higher than on a PC, but of course, the value of the PC is much lower. So the earning per PC, I would say it's about the same as if you would do a new one. And that's our aim actually to be there.

The next question comes from Mikael Laséen from Carnegie.

Can you explain, first of all, what went wrong with the ERP implementation and what actions have been taken to resolve this? And where do you expect to recover some of the lost sales during Q2?

Yes. I think the -- we have to start by saying that replacing the full ERP platform in a country -- in a major country is quite a complex project. And I don't think you will -- nothing has to go totally wrong in order to see impact from that. But if you look at some things that we could have done, I think, in a better way, it would be to do more training of the users because what is actually happening is that the system as such works relatively well, but all the ways of working have changed for all our employees. And there, we had some initial challenges. This has been addressed during the quarter, and it was good to see. And as you could see in the presentation that November numbers were significantly better than October, for example. So we are quite positive on the development of how the employees are able to use the system going forward. And therefore, we say that we don't see any significant impact coming from the implementation of platform going forward. Now the question of how much of the volume that we, let's say, dropped in Q1 will move to Q2. That's a very difficult question. And we don't really have a good answer to that. We will, of course, try to pick up as much as possible of that. But to give you a number on that, it's really hard.

Yes, of course. So the underlying growth in the LCP side, that's more 10%, minus 10% roughly, and you don't see any major changes or...

No, I think that's a good -- I think exactly that is my thinking as well is that the 10% is more in what we have seen, the volatility between the quarters previously coming and going. And I see the similar situation now. So no big change in that actually when compared -- except for implementation of ERP.

Okay. And in terms of market share in the LCP space, how do you see that developing in Q1 and going forward? Have you lost any market share and so and on?

I think if you take Q1 alone, yes, we would have lost market share. If you would take it, which is almost impossible to take just one quarter, so if you would take it on a more rolling 12 months, I think we have in the last 12 months, probably lost a little bit, but over the last 2 years, not. I think we are on a pretty stable base at the moment with a bit of losing some public contracts, but also gaining quite a few in the last year, as you know.