Welcome to Dustin Group Q2 report. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to CEO Thomas Ekman and CFO Johan Karlsson. Please go ahead.
Great. Thank you very much. I'm sorry for the slight delay here with the connections, but here we are. Good morning, everyone, and most welcome to our second-quarter presentation and conference call. Hope you're all well here on my side of the call. As I said, this is myself, Thomas Ekman, and we have Johan Karlsson, CFO, but also soon to be CEO, and our Head of IR, Fredrik Sätterström here in the room as well. We present our second quarter results for our fiscal year 2022, 2023. Our Q2, as you know, from December to February, was on a macro level, very similar to Q1 and continued to be characterized by a cautious trend among small and mid-sized companies in the SMB segment, while demand remained favorable within the public sector and large companies.
An improved product mix within LCP in combination with the expiry of the agreement with SKI 50.40 in Denmark, supported also a good margin improvement sequentially from Q1, also the reduced tied up capital and inventory enabled an improved net working capital and lower net debt during the quarter. I must say it is encouraging to be able to present the progress for the quarter that is in line with the scenario presented during the capital markets update in February. We continued the year with a total growth of 2.2%, despite an anticipated and clearly cautious development in SMB. Access to standard hardware was good and has fueled a certain degree of price pressure in the market.
As we have said before, we see the same patterns as in previous economic crisis that SMBs are the first ones to react. Corporates are a bit slower and the public sector continue to spend. Typically, these periods have lasted around two to four quarters, and now we have passed the second one. Although we have a negative growth on SMB, we can see a stabilizing market, especially in the later part of the quarter. We are also further progressing well in our integration in Benelux. As you saw this morning, we are now taking the next steps in efficiency and customer attention by merging our two large corporate and public organizations to one. They will be headed by Michael Haagen, who previously was responsible for our Nordic LCP organization.
And he has great knowledge in combining countries and merging, and building together one organization. This is a very good move and also will, of course, create more synergies for us. And, and thus, of course, lower cost over time as well as an improved customer offering. Let's go into our Q2 presentation and the, or for some more details. As you know, we have our, for your reference, we have on slide 2, Dustin at a glance, but I think we can move directly to slide 3 for some financial highlights. As said, the second quarter continued to be dominated by general economic uncertainty and a cautious trend among some of our customer groups.
The availability of hardware was good and continued demand among large customers laid the foundation for favorable growth, despite a cautious attitude among the small and medium-sized companies. Net sales up 2.2% to SEK 6.2 billion. Organic growth was -2.4%, of which -10% was for SMB and +1.1% for LCP. After a weak start in December, demand has stabilized within the SMB segment, but it also remained obviously cautious, but especially maybe on the small-sized companies, but large companies in the segments, together with consumer sales, displayed a positive growth during the quarter as a whole.
Development in LCP was generally strong, both among large companies and to the public sector, but was impacted negatively this quarter by the expiry of the Danish framework agreement with SKI, now during the first quarter. But a high level of activity and also a strong influx of new customers in all and/or in several of our markets, in all markets, have also offset this to a certain extent. That has also been despite our more generally or more selective and margin-focused attitude towards new customers and agreements from our side. Gross profit came in at SEK 914 million, up from last year's SEK 904 million.
The gross margin amounted to 14.6% for the quarter, which is a good improvement or a distinct improvement compared to the 13.4% in the first quarter. Sequentially, very good. The improvement is mainly attributable to developments in the LCP segment, where the product mix have started to improve and improved over the quarter with a larger share of more advanced hardware. Combined also with the phase out of the major Danish agreement, as I said, with its low margin. Gross margin within SMB weakened during the quarter as a direct result of high proportion of campaign goods and shift to more basic alternatives in the product offering.
Adjusted EBITDA amounted to SEK 212 million, and the adjusted EBITDA margin was 3.4%, which clearly indicates an improvement compared to the 3.0% in the first quarter, which is, of course, encouraging to see. EBITDA amounted to SEK 157 million, and including items affecting comparability of SEK -9 million. Those are primarily related to the integration of Vincere and Centralpoint. Earnings per share was SEK 0.72 compared to last year's SEK 1.27. Cash flow from operating activities amounted to SEK 250 million during the quarter and improved sequentially compared with the negative SEK 85 million in the first quarter.
Net debt decreased with SEK 152 million to SEK 4.6 billion at the end of the quarter, compared to SEK 4.759 million in the first quarter. As a result of slightly lower profit, net debt in relation to adjusted EBITDA was 4.4 compared to 4.3 in the end of Q1. The current leverage level, however, is assessed as being temporary, and we see that it will, we expect it to fall in the next few coming quarters. Other operational highlights this quarter is of course, that the inventory declined to SEK 1.2 billion compared to SEK 1.6 in the first quarter. This is mainly as a result of reduced customer specific inventory.
Here I must say I'm really proud and of course encouraged what we have achieved here. This strong improvement means that we are ahead of our target, our own target of an inventory value of SEK 1.1 billion at the end of August, i.e., this end of this financial year. It also shows that the imbalances that has been during the fall has started to become more balanced in the supply chains, which is of course very good. As you have seen, we updated our financial targets and segment reporting in our capital market update that we held on February 21st, and we will come back to that later on in the presentation.
We are on track with the integration in Benelux and continue with the synergy extraction, the identified SEK 200million-220 million where we see clear effects will come in the second half of this year. Also as an example, merging our two LCP regions into one as the next step in the integration. Then of course, the great news that Johan Karlsson has been appointed as the CEO. Very good. Johan, you can by that also continue to take us through the segments.
Yes. Let's move to next slide 4, and the SMB segment in some more detail. As this is the first quarter with the new segment definition, including B2C, you will see some new numbers and levels in the segment reporting. Sales for the quarter ended at SEK 1.822 billion, representing a negative organic growth of 10%. In the quarter, we saw that the economic uncertainty is continuing to affect our small- and medium-sized B2B customers. However, sales to the larger SMB customers and consumers was slightly stronger than last quarter. From a geographic perspective, sales was strongest in Denmark and Norway. In all markets, the promotion activity is high as everyone is trying to increase sales at the same time as demand is low. This affects margin somewhat negative.
As we continue to realign the service portfolio, the share of software and service was down from 14.6 last year to 11.3 in Q2 this year. The main reason being a lower software share, but also the move away from time and material consulting and outsourcing in the service area, and by that, moving towards the standardized managed services. This is now possible as the integration in the Benelux is continuing and the data centers are being consolidated and common European assortment is introduced. The segment margin reduced from last year, 6.7 to 4.4. Lower volume due to weak demand put pressure on margins as cost base is too high for the actual volumes affected by high inflation. Added to that, the high share of promotional sales is weakening the margins.
Balancing the weaker margins is the strong sales of contracted recurring services with margins above average. Also private label is continuing to deliver strong sales and margins, contributing positively to the margins and profits. Segment result ended at SEK 80 million compared to last year's SEK 135 million. We then move to slide 5 and the LCP segment, where you could see that sales in the LCP segment was SEK 4.45 billion in the quarter. That was an increase of 7.4%, of which 1.1% was organic. During the quarter, sales slowed down due to the expiration of the large Danish contract, as Thomas was mentioning before, where only residual volumes were delivered in the quarter.
Compared to last year's sales, for the same quarter, we dropped approximately SEK 250 million in sales. However, we saw very strong sales increase in both public sector and large corporates outside the Danish public sector. Availability of standard hardware continues to be good, and in this quarter we could also see clear improvements when it comes to the more advanced product categories. From a geographic perspective, growth was strong in all countries outside Denmark, but strongest in the Netherlands. Segment margin was 3.9% compared to 4.2% last year. Product and country mix was positive to the margin, while inflation put pressure on cost, affecting margins negatively. As in SMB, private label product affect margins and result positively in the quarter, and we continue to see really good progress in the Benelux region with great potential.
Segment result for the quarter was SEK 173 million, which was up SEK 1 million from last year. We move on to net working capital on the next slide. Net working capital end of the quarter was SEK 229 million, compared to last year's - SEK 433 million. Sequentially, the net working capital was down from SEK 336 million. The higher net working capital compared to last year is mainly an effect of lower accounts receivables as purchasing was low due to the ambition to reduce inventory. If we look at the details, we can see that inventory in the quarter was SEK 1,220,000,600, that was SEK 39 million down from last year and SEK 390 million down from Q1.
This is the result of a better availability and improved processes in regards to inventory management. More about inventory, a little bit later in the presentation. Accounts receivables was up SEK 237 million, mainly as a result of higher sales volume, but also the mix change towards more LCP with slightly longer payment terms than SMB. If we look at accounts payables, they were SEK 3.428 billion. This was SEK 356 million lower than last year. The majority of this effect, it comes from lower purchasing volume due to the active work of reducing inventory levels.
As the supply chain situation is now improving and our way of operating, mainly in the Benelux, is being changed, we continue to believe that inventory will come down to the more normalized levels at around SEK 1.1 billion during the year. This makes us continue to believe in our target range of - SEK 100 million to SEK 200 million in net working capital. If we look at leverage, as Thomas said before, net debt in relation to rolling 12-month EBITDA at the end of Q1 was 4.4, where our target is to stay in the range of 2-3. Currency differences and lower result affected net debt and leverage upwards during this quarter. If we move to look at inventory in some more detail on the next slide.
Here you can see, as we said before, total inventory level at the end of Q2 was SEK 1.22 billion compared to last year's SEK 1.259 billion, and last quarter's then of SEK 1.61 billion. As you can see in this graph, the main improvement comes from the customer-specific inventory, where the inventory value came down with SEK 338 million. This is actually the result of, mainly in the Benelux, but also in the Nordic, a joint effort between supply chain and sales in bringing customer-specific inventory down. We also have actions in place to further reduce the inventory levels down towards the SEK 1.1 billion as we have stated before. Having said that about inventory, let's move to the next slide and cash flow.
Cash flow for the quarter was - SEK 19 million compared to +SEK 15 million last year. Looking at the parts, we can see that cash flow from operating activities before change in net working capital was SEK 122 million. This is significantly lower than last year, mainly coming from a lower operating result. If we then look at change in net working capital, which is + SEK 122 million, slightly above last year, where the main difference really is being the low accounts payable due to inventory reduction. Otherwise, this change would have been bigger, and sequentially, we will see that coming in the next quarter. Cash flow from investing activities was SEK 64 million, and of which SEK 52 million was related to IT investments, and this should be compared to in total of SEK 75 million last year.
Cash flow from financing activities was -SEK 205 compared to -SEK 298 last year. This is mainly attributed to amortization of debt. For getting investments, total investments amounted to SEK 79 million compared to last year's SEK 19, and the CapEx related to IT development was SEK 53 compared to SEK 40 last year. Out of the SEK 53, SEK 34 is related to the project of moving Dustin onto the same ERP cloud-based system. Investment in tangible and intangible assets decreased from SEK 40 last year to SEK 15 of Q2 this year. Finally, investment in assets related to service provision was SEK 12 million compared to last year's SEK 9. All in all, SEK 64 million out of the SEK 79 in CapEx was affecting cash flow. The other SEK 4 changes in lease or rent contracts.
By that, we move back to Thomas.
Great. Thank you, Johan. Let's move to next slide here. Just to recap on our updated financial targets and our goals. As you saw in February when we had the capital market update, we aim for a 10% three-year annual growth rate of EPS. That target EPS growth will be supported by an 8% organic target growth for SMB and a 5% organic growth for LCP, with segments margins according to our new segment reporting of, where we aim for more than 6.5% for SMB and more than 4.5% for LCP in the coming three-year period.
We keep our leverage target to be between 2x-3 x EBITDA, we are working on our way down on that, as Johan mentioned. We also keep our dividend target to distribute at least 70% of net profit, obviously depending on the financial situation at the time. We want also to put more, even more light and emphasize even more on our CO2 target, where we aim to decrease our emissions with 25% in the coming three years, contributing to our already communicated and ambitious 2030 commitment of being CO2 neutral.
These are our targets that we will follow now for the coming three years, and continue after that as well, obviously. If we then move to the next one where we have a new segment reporting, this is a fairly busy slide, but you are used to that. Where we have a new segment reporting and supporting the cost focus we have, where we have merged B2C into SMB. Seeing that that is of course more logic to do now when B2C holds for 2% of sales, and it also reflects our, how we are organized. This means that the new segment margin targets for the segment, as well as the new target for remaining central costs, which is now also more clear and, or clear central cost.
We do these changes of course in a way that we want to increase transparency and the clarity and the understanding on how we look now, given that we have developed a lot since the IPO and looks a bit different than we did at the time a couple of years ago. As you saw this morning, we are also merged our two LCP organizations to one, which will give us efficiency, one way working, and better customer offering across countries and across group. If we then continue to next slide here, our path decrease our CO2 impact.
I mean, obviously we have our clear targets towards our 2030 commitment of becoming CO2 neutral, we see, and we can also drive the trend towards sustainability, and where sustainability is truly becoming an integral part of buying IT in our parts of the world, in our markets. We aim for a 25% reduction in CO2 equivalents per million SEK sales in the coming three years. We are doing and have done a lot of actions to improve and reduce, like for example, our take-back offering, and we have linked our financing to our sustainability targets, and we are also compliant with TCFD, as well as taking on a full value chain approach, including Scope 3 in our work.
There's obviously a lot more to do and more potentials where we will as soon as possible sell more refurbished products online. We will also use, or we are using and start to use even more our data that we gather to help our customers to make the right choices. Not the least, of course, make use of our size and scale to influence our vendors, our suppliers, and by that push the whole value chain to forward to more sustainable solutions and improved ways of working. We have clear targets in place for achieving this. Before moving in then to Q&A, let me just sum up the results on the next slide here. Net sales grew 2.2% to SEK 6.2 billion, SEK 6.272 billion.
Group organics net sales growth was -2.4 in constant currency. Organic growth in SMB was -10 and LCP was +1.1. Gross profit of SEK 914 million compared to SEK 904 last year, and gross margin at 14.6%. Margin change is due to the sales mix with a higher share of LCP sales, but it's also counteracted by a positive product mix as we were into before within LCP, which is great. Of course, sequentially very improved margin, which is good to see. Adjusted EBITDA was SEK 212 million and adjusted EBITDA margin of 3.4%. A clear sequential improvement here again versus the 3.0 in Q1.
Margin was mainly affected by higher share of campaigns and cost inflation as well if you compare to last year. EBIT was SEK 152 million. EPS amounted to 0.72. Cash flow from operating activities was SEK 250 million. Leverage, as we mentioned before here, was 4.4 in the past 12-month period. Yes, on operational highlights, obviously Johan Karlsson has been appointed as new President and CEO. We have updated our financial targets and segment reporting. Very encouraging, we have reduced the level of customer-specific inventory, pushing ourselves ahead of our plan on that.
Synergy extraction on track with the clear effects of, as of second half of 2022/ 2023, and with full effect expected in the next financial year, 2023/ 2024. As said before, as an example, we have merged the two LCP organizations as a next step of increased scalability and knowledge sharing and of course customer offering to improve that. To summarize, in recent quarters, market development has been characterized by general economic uncertainty and a cautious trend in some of our customer segments. The performance was in line with expectations and in historical terms reflected the pattern, I must say, in our business. We are demonstrating progress towards our target scenario presented in the capital market update.
We have seen some stabilization within SMB in the later part of the quarter, which makes us cautiously optimistic ahead of the upcoming quarters. We are on the right path in a turbulent time, it is of course with complete confidence that I hand over the leadership to Johan Karlsson as the new CEO of Dustin from Monday. Johan has, as you know, extensive experience and solid knowledge of Dustin and in all the markets we operate. Also Dustin is well equipped to address the short-term turbulence in the market and is also well placed to meet the strong underlying market trends. Obviously, I want also to take this opportunity to extend my warm thanks to all employees, customers, shareholders, and other stakeholders for your confidence and a fantastic time at Dustin, which I will continue to follow from, but from another level.
I wish obviously also Johan the best of luck in everything with the team and continued journey ahead. With that, we can conclude our presentation and take any questions you might have.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. The next question comes from Mikael Laséen from Carnegie. Please go ahead.
Okay. Hi, good morning.
Good morning.
I have a few questions, starting with your comment about signs of stabilization in the SMB segment at the end of Q2. Can you sort of explain what you mean here, what you have seen, and what this means?
For sure. I mean, what we see was or what we saw in the beginning of the quarter, thanks for the question, by the way. What we saw in the beginning of the quarter was December was weak, and it was weak all over, especially in Sweden it was weak. In all Nordic countries it has been stabilizing, and we can see that we are fairly sort of flat in the end of the later part of the quarter. That makes us, and we can see continued development there.
That, as I said, that makes us cautiously optimistic of that we actually are seeing the same trends as we have seen before in economic crisis where the SMBs, as I said, they are early to react, and they reacted a lot in first quarter and also continued a bit in the beginning of this quarter. Now we can see that it's stabilizing, and that also shows that, I mean, continuously our SMB customer also want to do, continuously do business where their customers in turn. That is, as I said, cautiously encouraging to see.
Mm-hmm. Okay. Was it flat, month-over-month or was it year-on-year? Just to understand the trend in the quarter.
Yeah. It was flat also from a year-on-year, sorry, from month-by-month. So it was, yeah, it was stronger in the end of the quarter than in the beginning of the quarter.
Okay. Yeah. Can you, sort of in more detail talk about the market situation, the supply of IT products, standard and advanced, where you are, compared to, last quarter and, the quarter before, and what you see ahead, and the demand side, how that is affecting, the volumes and the prices?
Yeah. What we can see, I mean, this is obviously a mix of what all the things we do internally versus how the market is. If you look at the market, we see, as we said also here before, is that there is a much more stable delivery, and the supply chains are much more in balance now than they were during the fall or during the last quarter and also a year ago. As you remember, there was a lot of imbalances and products were coming, and China was opening and closing, and now it's more back to a normal situation.
Which is also very encouraging to see that the supply of more advanced products, especially for that we sell a lot to the LCP segment, that is also coming back to play in a much better way, which is then at least translated to a better gross margin. I think that at least as it looks right now, during this quarter, it seems like we have a or we see a much better balance in our procurement and in the supply chains.
Okay. Yeah, just curious about, I mean, following up on this-
Yeah.
... I mean, the mix shift towards more advanced IT products, how significant is that? What is the magnitude in improvement, and is it fair to assume that this situation could continue and support the LCP margin also in the coming quarters, or is this more of a temporary improvement there?
I think we will move back to more normal share of advanced versus standard in the coming quarters. It's improved a little bit during this quarter. I think the margin effect, hard to calculate, of course, on exact numbers. I think on the gross margin level, you could feel that there is a support of maybe 0.2%-0.4% additional margin coming from the advanced side this quarter. It's like it's not-- It doesn't change the world, but it's at least positive to the total margin levels.
Okay, got it. My final one, if it's okay, is on the cash flow, and the outlook that you had on the last slide, net working capital comment are coming down from +SEK 300 to -SEK 100. Can you talk about the what you're doing exactly to take it, to take net working capital to those levels, and if this is fair to assume already by August this year?
I think we're doing a couple of things in the area of net working capital that we believe will take it to the levels we were around our target. One is obviously to continue to bring down inventory to the 1.1 level. And the other one is to work with the synergies as we are pooling purchasing together in the whole group.
Where we can ask for better payment terms. We have seen that come through in, I would say, four or five distributors so far, and we will see that effect partially in Q3, and I would say almost fully in Q4. There you will see better accounts payables coming from the terms change. Finally, we are setting up a whole new process for collecting receivables in the Benelux region where, I would say, it's a bit more challenging situation to collect there than it is in the Nordics, and we need to be more on our toes to collect money in that region. That's we have put in place, and there we believe that can improve receivables towards the, let's say, -SEK 100, SEK 200 goal.
These three, I would say, are the key components to bring it down with, approximately SEK 300 million more.
Mm.
Or, SEK 350 million more.
Yeah.
In that range.
Oh, okay. Got it. The payable side, the distributors there that you have new terms with, those are in place, but how many more are? Do you still have to re-negotiate change?
They are negotiated, but not in place in all, in all the distributors. I think there are maybe one or two left to be negotiated, but as per the agreement we have now, they should all be in place from, if I'm not incorrect, I think from the latest one from the first of May. We are, as we speak, let's say, collecting them as synergies.
Okay. Got it. This is more or less in place that payables can go to the level where what you highlighted in the Capital Markets presentation, I guess.
Yeah. Yeah.
Okay.
I think this-
I-
... I mean, we've talked about that before, that we balance, of course, payment terms with other terms towards the suppliers. Maybe we have pushed a little bit harder on payment terms now in order to make sure that we get back to normal levels on working capital.
Okay. Got it. Thank you.
Thanks.
The next question comes from Claes Danielsson from Nordea. Please go ahead.
Taking my questions. Just a couple of follow-ups and another couple of questions from my side. If I understood correctly, it's sort of that 0.2-0.4 percentage point improvement on the product mix. Is that sequentially, I guess, from Q1? That's the first question. I was just wondering, is the rest, the kind of Danish contract that's churned, or could you also quantify how much support that is giving on the gross margins would be super helpful.
Yeah. I mean, yeah, it's sequential. Just first, answer the first question. Second question is that, you could say that the Danish deal last year was about SEK 350 million at very low margins.
Mm.
We have replaced them with average margin deals compensating that. I think you can get that from a mathematical perspective, the impact it has.
Mm.
That, that's the way it has panned out in the quarter. The neutral sales development compared to last year is actually a negative in Denmark and then positive in all other countries compensating.
Okay. I mean, if we just look at the gross margin in total over the coming few quarters, I guess you're guiding that it should come down a bit from this level. Am I interpreting that correctly, just to be very clear?
No. It? What? How did you? Or what?
No, just from the comments on the product mix being better and then that coming back a bit, so that's 0.2%-0.4% levels, basically.
Yeah. I think honestly, We are set up for at least continuing with the margins. We have even improved them a little bit, you know, as we are getting back to more normal product mix and as we are catching more new contracts at better levels than the one we lost in Denmark.
Yeah.
I think it can continue to improve. Obviously, it will be some ups and downs, but trend-wise, it should go up. Yes.
Okay. Got it. Very helpful. Then just ending off on the cash flow side, I mean, clearly a big inventory release, then you have some kind of offsetting in the liability side. On those liabilities, do you expect that to swing back in the coming quarters? Then also on the inventory side, do you see any additional scope to kind of bring that down lower than SEK 1.1 billion? Or how should we think about that?
I think the 1.1, I mean, we set the 1.1 as a target because it was-- If you added the different entities together before, the inventory started to go up, that was about the level we had. I think we will regroup as we reach 1.1 and see if we can do better than that because obviously, we don't wanna have more inventory than we need to. I'm sure we will come up with a target that is improving from the 1.1, but let's first hit the 1.1.
Mm.
When it comes to the net working capital in the quarter, it's really hard to reduce purchasing at the same time because when you reduce purchasing to reduce inventory, you do unfortunately get less payables, which is good, but affects the working capital a bit. As soon as we are back into stable purchasing, i.e. stable inventory, that will be on a lower level than before, that will improve as well.
Okay. Okay. Fantastic. I think I'll close out there. Thank you.
Okay.
Thank you.
Thank you very much, Claes. Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Okay. Very good. Thank you very much everyone for participating and listening in, and thank you also for all the ears here, and we look forward to meet in other opportunities in the future. Thank you very much, and have a great day.
Thank you.
Bye-bye.
Bye-bye.