Earnings Call: Q2 2021

Aug 11, 2021

Welcome, ladies and gentlemen. I'd like to welcome you cordially to our analyst call on the second quarter and on the first 6 months of 2021 of Bechtle AG. I'm very happy that you're interested in our company. I would particularly like to welcome international analysts and investors. I'm very happy to have you on board. I would also like to invite you to the Q&A session after the presentation. You can ask your questions either in German or English. A very warm welcome to all of you. With our ad hoc announcement of July 26th, we've already published the most important performance indicators for the second quarter. Well, the feast has gone, so to speak. Still, there are some interesting aspects I would like to address in greater detail. Well, today's presentation is divided, as usual, into 4 major areas. We start, as you see here, with the business development, a glance on the essential performance indicators of the 2nd quarter and the 1st 6 months. Next, we look at the Bechtle share, the share price development, which was very positive, and particularly in the last few days. Under the headline highlights, I'm going to address important strategic, qualitative, and non-financial events that are important for the future development of Bechtle AG. We conclude with the outlook on 2021, where we address the general framework conditions and our targets. Let us begin with the business development. In the 2nd quarter, we were still facing the 3rd wave of the COVID-19 pandemic. Thankfully, as of May, we could see an easing throughout Europe. This is reflected in the development of the gross domestic product, as well as in economic trend indicators. At the same time, however, the IT market was confronted with ever stronger supply chain problems. Delivery times currently exceed 12 months in some areas. The gap between incoming orders and revenues, usually virtually nonexistent at Bechtle, has further increased. Despite this development, however, we can look back to a very successful second quarter 2021. This is reflected in the following chart that shows the revenue development across the year. Revenue growth in the second quarter reached an outstanding 9.3%, almost the level of the previous year's second quarter. Since there was no major acquisition in the past 12 months, our organic growth rate lies at 9.3%, too, after 10.4% in the quarter in the year before. For the first six months, we've seen growth of more than 10%. In view of the supply bottlenecks, this is a truly strong development. Even more so since we are comparing the figures with a very strong first half of 2020. All of us, Bechtle and the capital market, however, have to face reality. That means that growth is, of course, impacted by a lack of availability of almost all IT products. Let us look at the revenue development in our corporate segments. Segment reporting shows almost an inverse development year-on-year. The IT System House and Managed Services segment had shown an outstanding performance in the truly difficult second quarter of 2020. It is against the backdrop of these high comparative figures that you have to assess the revenue growth of 1.2% in the second quarter 2021. What is more, the current supply bottlenecks had a greater impact on large-scale framework contracts, much stronger than in the sister segment. That is, the IT E-Commerce segment has seen a significant second quarter increase of 26.9%. I don't want to belittle this achievement, but you have to bear in mind that last year, this segment was under extreme pressure due to its international orientation. As you surely know, France is the biggest national market in this segment. This takes us to the earnings development. Let us begin first with the EBIT development in the reporting period. EBIT growth in the first quarter reached an excellent 18.1%. Just as a reminder, during that period, we set aside risk provisions due to supply bottlenecks in the amount of EUR 13 million. In the second quarter, EBIT increased by 38.8%. This value is influenced by one-off effects in the amount of EUR 9.5 million, i.e., the partial reversal of risk related provisions made in 2020 and/or in the first quarter of 2021. Far we can say that the 6-month growth figure of 29% properly reflects our adjusted operative development. The inverse one-off effects for both quarters nearly balanced out. Let us now look at the development in the segments again. EBIT in the IT System House & Managed Services segment increased during the reporting period by 33.3%. The margin is up from 4.5% to 5.9%. Without one-off effects, EBIT rose by a very good 14.8% and the margin by 60 basis points to 5.1%. The so-called COVID-19 driven cost savings had no additional positive effect since they had already been included in last year's figures. In the IT E-Commerce segment, EBIT grew by just over 50%. The margin rose from 4.6% to 5.5%. In purely operative terms, EBIT grew by 39.4% and at 5.1%, the margin is 50 basis points up year-on-year. In the group, EBIT grew by just under 39% and with 5.8%, the EBIT margin is significantly higher than last year. Without one-off effects, growth is at 22.8% and the margin at 5.1%. That's 60 basis points above the previous year. Let us conclude. In summing up, we can say that no matter how you look at it and how you adjust the figures, Bechtle has completed a very successful first six months. Let us conclude our key performance indicators with the operating cash flow, which also continued its positive development. Operating cash flow for the first six months reached EUR 47.3 million. Almost 17% more than 2020. Improvement of trade payables had a particularly positive impact here, contingent upon closing date. We've been able to further reduce trade receivables, but not as strongly as in the previous year. DSO decreased slightly from 41.9 to 41.8 days. Due to the global shortage of IT products, we've raised our inventory levels considerably. In the current situation, availability is what truly matters for our industry. Free cash flow has continued its positive development. It rose from minus EUR 31.6 million to plus EUR 23.3 million, a swing of almost EUR 55 million. All in all, we are very pleased with the development of all our key performance indicators. Let us look at our employees then. As at June 30th, 2021, Bechtle had a headcount of 12,421 employees. That is almost 4% or 466 people more year-over-year. Like in previous quarters, headcount increase is palpable but moderate. There's one special aspect hidden in these figures, however. Given that due to the COVID-19 pandemic, we could not realize major acquisition in the past 12 months, the sole exception being dataformers Linz, Austria. This increase is mostly due to proper new hires. This goes to show that Bechtle is in a good position as an attractive employer, and we're still able to fill vacancies pretty promptly. To maintain and expand this position, we are revising our employer branding. The first responses from the market are very positive. This takes us to the development of our share price. We are all close to the markets, and we all know that the capital market in the first six months of 2021 was still impacted by the COVID-19 pandemic. The premises were different, however. Decreasing incidence values in the second quarter, vaccination progresses, and also the economic recovery led to rising share prices. Due to the economic recovery and the outstanding performance of many tech stocks last year, a lot of investors have redeployed their portfolios. In the course of so-called sector rotation, cyclical stocks were favored and profits taken in other values. That, for a certain time at least, was at the expense of some tech stocks, Bechtle amongst others. As you can see on this slide here, we had a good start, but our share came under pressure in February. With alternating ups and downs, our share price showed a kind of flat curve for quite some time, with yet another dip in May. Since July, however, our share is once again on the rise. Previous declines have mostly been offset by now. That takes us to events that are particularly relevant for us. Let's be grateful for this. Apart from COVID-19 and the delivery bottlenecks, there were positive news as well. From our point of view, these were the most important topics. Let us start with a project of a European cloud solution, GAIA-X. A consortium led by Bechtle is among the winners of the Federal Ministry for Economic Affairs and Energy's competition called GAIA-X. The winning submissions are intended to serve as flagship projects to highlight the technological and economic benefits of GAIA-X. The European GAIA-X initiative aims to develop a secure and networked data infrastructure that meets the highest data sovereignty and requirements and also promotes innovation. Within the framework of Project POSSIBLE, as it's called, Bechtle is collaborating with six other partners to develop an innovative and user-friendly cloud solution. The next highlight concerns a topic that is becoming increasingly important for the capital markets as well, sustainability. Bechtle has agreed to a partnership with Fairphone and will be marketing this manufacturer's products in several European countries. Headquartered in the Netherlands, this is a company that for its smartphones, pursues a comprehensive and sustainable strategy covering the entire product life cycle. Bechtle is one of the first sales partners in the IT sector to provide Fairphone models for corporate and public sector customers. The focus of the company so far had mainly been on the B2B segment. Fairphone is the first and only smartphone company, by the way, to have been awarded the Fairtrade gold certificate. The next item concerns our cloud business, which will continue to be a strategic focus. Bechtle has chosen to take the mission-critical cloud solutions portfolio and expand it by the Virtustream offering. Virtustream is part of Dell Technologies, and as a cloud company in the enterprise segment, it helps corporate customers and organizations everywhere in the world transform their IT and move their mission-critical applications to the cloud. Virtustream does this by taking the security and compliance requirements directed at a private cloud and combining them with the flexibility and scalability of a public cloud, thus creating an agile, high-performance solution. Bechtle is offering the Virtustream cloud services via its own cloud platform, thus allowing it to seamlessly integrate with its customers' hybrid and multi-cloud infrastructures. Let us return, as announced, to the Bechtle share once more and begin with a look at the dividend. On June 15th, 2021, the annual general meeting of Bechtle AG signed off on the payout of a dividend of €1.35 per no-par share. This is an increase of 12.5% compared to the previous year. This puts the payout ratio relative to the results after taxes at nearly 30%. This allows Bechtle's shareholders to participate in the very positive development of the group in fiscal year 2020. The dividend yield relative to the closing price was almost 1%. Bechtle shareholders, since the IPO in 2000, have received an annual dividend every single year. This latest dividend represents the 11th increase in a row, and this too reflects that Bechtle can be relied upon. Another important measure concerning our shares will be implemented between Friday and Monday. To put it in simple terms, it will be a stock split with a 1 to 3 ratio, which was also adopted at the most recent annual general meeting. The timeline for the decision taken by the AGM to increase the share capital by means of company funds has now been established. This weekend, this measure will be implemented from a technical point of view. As a result of the 1 to 3 stock split, the number of shares will triple while the share price, starting next Monday, will be divided by three. Don't be taken aback when starting on Monday, you'll start reading reports generated by algorithms such as Bechtle share price falling sharply. In fact, that is what happened when we last split our shares. The purpose of this move is to improve the tradability of our securities on the stock market and to make it easier to start purchasing shares or expand current shareholdings for a broader group of investors. After the last split in 2017, the tradability of our stock had already improved significantly. We expect this upcoming move to have a similar effect. Of course, we also hope that this will allow us to use the reduced share price as a starting point for another upward trend, even if from a technical point of view, as we all know, nothing's really changed. Let us take a look at our international activities, specifically at our Global IT Alliance called GITA. The Global IT Alliance, initiated by Bechtle AG in 2013, is expanding its network by another new partner, this time it's one based in India. Dynacons Systems & Solutions has a successful track record of 25 years in the Indian market. With this IT company, GITA has found a piece that was missing on its map of the world, and customers in the strongly growing Indian market will now have a very experienced partner. Dynacons is headquartered in Mumbai and employs more than 1,000 people in over 250 locations in India. Let me remind you, GITA is a global alliance of carefully validated IT companies, whose aim it is to offer customers a standardized quality of support for their international projects. Now on to a piece of news that has just come in this Monday, our 101st acquisition. We have succeeded in acquiring the CAD, CAM and PLM specialist, Cadmes, who's active in the Netherlands and in Belgium. Founded in 1991 with a focus on 3D CAD software by Dassault Systèmes and SOLIDWORKS, this is a specialist reseller who currently employs a staff of about 100 people. In the 2020 fiscal year, Cadmes generated revenues of some EUR 17 million. Bechtle itself is already being represented by seven SOLIDWORKS entities in Germany, Austria, and Switzerland, and Cadmes is allowing us to visibly expand our CAD CAM business to Benelux as well. That means it also allows us to strengthen our European competitive situation. Finally, one more point, which cannot be considered a highlight by any means, but which nevertheless is of great importance also to me personally. I'm sure all of us are still shocked by the images of the catastrophic floods that hit Germany and other parts of Western Europe. The large group of people who are affected by the floods also includes some of our colleagues at Bechtle. At the same time, though, we are witnessing a great degree of solidarity and willingness to help, and as a company, we too would like to do our part to make a tangible difference. For this reason, Bechtle has decided to set up a dedicated support fund, which will start with an initial sum of half a million EUR. We hope most of all to be able to help those of our colleagues who are directly impacted by the floods, help them quickly and without any bureaucracy. Above and beyond that, we have donated another EUR half million to Germany's Relief Coalition called Aktion Deutschland Hilft e.V., so as to help ensure short-term aid where needed and to contribute to the long-term work of rebuilding those communities. With that, we already come to the outlook, ladies and gentlemen. On July 26th, we've already made an ad hoc announcement regarding the upward correction of our forecast. Given that, this isn't news to you anymore. From my point of view, this is an important and a clear signal, both for our company itself as well as for the capital markets, which once more confirms our optimism and confidence. Despite the great number of risks and current uncertainties, our business operations so far have been very encouraging, to which we have responded accordingly. In fact, we do not believe that this generally positive trend is likely to fundamentally change over the course of the year. At the same time, we are not turning a blind eye to the challenges ahead of us, the most immediate of which include the shortage of products and the supply bottlenecks. These supply bottlenecks have continued to become more tangible in recent weeks. By now, there is talk that this problem might stay with us until the end of 2022. Mind you, 2022. For some of our products, delivery times have stretched to several months, even up to 1 year. Our order intake figures are currently very high, but at the same time, they have decoupled from revenues to an historic extent. The willingness on the part of customers to invest in the current economic climate continues to be there. This is, in fact, a problem that's purely to do with availability. This, well, ambivalent situation is something we will have to deal with in the second half of this year and likely even still in 2022. What is helping us as Bechtle in this situation is, first of all, our strong competitive edge. Secondly, derived from this, the excellent network of partnerships we have with all relevant manufacturers in the IT sector, and let's not forget, thirdly, our financial strength, which allows us to use our possibilities to better ensure product availability than many of our competitors. All in all, despite the existing uncertainties, we believe in our strength and continue to be optimistic regarding the current fiscal year. Thank you very much, ladies and gentlemen. At this point, I look forward to any questions you might have.