Thank you for coming today. From the beginning, I want to apologize for my voice. We are here to present Q2 and H1 results. Interrupt me at any point in time to ask your questions. I will start with this. We have difficult market conditions, but the company is keen to being able to achieve its announced forecast to the market, both in terms of turnover, but also most importantly, in terms of profitability. Key corporate events. Breezy entered the seventh market, Azerbaijan, to explore its business. In this period, we have new iSpace stores reaching a total of 34. End of June this year, we paid the highest ever dividend, final dividend on 2023 results, a total of $0.50 a share, an amount approximately $28 million.
Monthly revenues, we show positive 5%, April 2% positive, May, and due to a very high base last year, -15% in June. On the distribution centers, we continue with the two main ones. Prague still remains number one, Dubai the second, South Africa very recent to help explore more business in the country, but also South African countries. Georgia for Caucasus mainly. In Kazakhstan, we are erecting a big distribution center for the region. Into financial results. The illicit trade in Kazakhstan continues. A significant 43% reduction in Kazakhstan sales in Q2 on a yearly basis. We are trying together with Apple and Kazakhstan government to do something about this. It seems that the steps are very slow. Therefore, the government is recognizing that they need to do something because they are losing money, they are losing taxes.
Apple is losing sales, same with us, and profits. It seems that the way out is the new product introduction by Apple. On top of the programs, of course, they offered so far, but the significant drop is there. It's still there. The new product introduction we expect will smooth down price differences and increase sales and profits. Highlights, financial highlights. Q2, 4% drop in the top line, 5% in gross profit. Gross profit margin is still strong, approaching 8%. Due to significant human capital investments, we see very high SG&A costs, while the financing cost starts coming down. Therefore, we see a 46% lower profitability in Q2 year-on-year.
On the EBIT and net income, the EBIT year-over-year, we experienced a 28% drop, down to $16.3 million, with a net income of $6.1 million. When we go by countries, Kazakhstan still number one, but losing significantly year-over-year. Dubai is growing, reaching number two position. Then we have countries like Slovakia. Poland is number six, growing quarter-over-quarter, gradually growing. When we go by regions, both the issues in Kazakhstan, but also Ukraine. Ukraine, less impact on sales, but impact also on profitability. When it comes to revenues, CIS is losing 25% for Q2, but all the other regions are growing. CE, 3%, Middle East, Africa, 11%. We are growing more and more into Western Europe with servers, with components, with own brand.
When we see by product line revenues, smartphones is only growing 1%. CPU still continues to grow 8%. Laptops, a minor drop, but servers and server blocks and SSDs are growing significantly on a year-on-year basis. We see more and more projects for servers and SSDs. Gross profit margin still at acceptable levels, almost 8%. Although all the issues we have behind us, especially Kazakhstan and Ukraine. SG&A costs, we see the number of staff, somewhat staying at the same level. We will see the same level or even a little bit less in Q3 as we made certain adjustments. Out of these new business segments, the own brands, the robotics, the Breezy, we will see what profits we get, what return we get, and we continue the cost-cutting.
We'll see how Q3, Q4 goes, and then we see how we further adjust the SG&A. The SG&A we adjusted already in Q2, the outcome of which is gonna show in Q3 and Q4. Actually, in Q2, we received more costs because of redundancies. A very challenging, we said Q2 and H1. On the top line, not so much. Q2, 4% in revenues due to high SG&A profit. Operating profits down 28% and net income down 46%. For H1, 3% on the top line, 21% in operating profits, and a 30% down on profitability. Net working capital utilization increased.
In these difficult market conditions we are trying to manage working capital, but if sales are less than expectations, obviously you get to have more stocks, and you get to have a negative impact on operating activities on the cash flow. On a year-on-year basis, $66 million cash spent from operations. For the six months, about $26 million behind. CapEx, more or less the same, mainly owed this year to Kazakhstan distribution center still under construction. We have a net cash movement of $107 versus $77 last year. Usually, the cash flow much improves from Q3, closing some of the gap of the first six months, and then improving much better in Q4. That's what the trend in our business says.
We still expect cash from operations to turn positive for the whole year, and I repeat, some of this gap to close to a certain extent in Q3. Debt, higher, but still at acceptable for us level. If I were to include also factoring advances into the picture, we see about 129 utilization, and that as a ratio to equity is about 0.5x, half the equity, reasonable. The effort here is to further lower the financing cost, something we have seen a little bit in the six month. More to see, I think, in the second half as the base rates gradually start to decrease, but also as the company searches for more, for cheaper facilities, either type facilities or different institutions to work with. We expect to see some improvement there, further improvement there. Moving on to the forecast.
Far on the revenue side, we achieved about 45%, but only 33% on net profitability. That's why we are confident to being able to achieve this forecast. We will know more once we see how Q3 and especially September NPI, new product introduction, will show in the markets Kazakhstan, Ukraine, et cetera, and we will know more. As we speak now, we are confident to achieve this announced forecast. We touched a little bit the dividends. Gradually growing dividend distribution to our shareholders. Reaching the peak last year with almost $28 million payment. A final dividend of $0.30 in June. This we expect to continue. Obviously, depending on profitability, but we expect to continue this pace. I think that, in a nutshell, the main topics with my voice not acting well. Most welcome any questions you may have on these results.
What was the cause of the small data loss caused by redundancies?
Excuse me?
What were the-
It was about 3.5% of this increase was owed to certain redundancies in Q2. I repeat, the saving of which will only show in Q3, to some extent will show in Q3. The investment, the main one was the investment in this human capital that continued, hoping to bring the benefits in Q3 and Q4, Canyon, Prestigio or Prestigio Solutions, Lorgar, Breezy, Robotics. So far, admittedly, we haven't received the necessary results. We have received significant increases on the own brands, but we expect much more given the investments we have made.
Okay, what is your view on AROS currently and its prospects?
It is not performing, I repeat, as expected. We are behind numbers. We are having improved numbers, but we are behind the budgeted numbers for this business segment. We are changing a little bit the approach. We have a new management of this robotics under Greece. The main hub will be Greece now for robotics. We will see what we expect to see, the sales and the gross profitability starting from this year. Depending on the results, I repeat, we will make certain adjustments. So far we are fully investing into this business because we spend already significant money and we expect to see results.
Okay. Could you put more color on the situation in Kazakhstan? What are these illicit actions from your competitors that cause this significant GP drop of revenues from this market?
They buy product from different markets, India, China, Japan, and they bring it illicitly, illegally into the country. Therefore, they are price competitive because they don't pay importation taxes. That's where the pain comes, both on revenues, but most importantly on our profitability. Apple is giving us different programs to remedy, but it seems that the price gap is big to remedy to a good extent. The government is interested to fix it because they are losing money, they are losing taxes. Apple wants to fix it in the sense that they will push more sales to the country through normal distribution. It takes time, and we believe, and they believe also that the new product introduction in September will crystallize things, will, you know, show results, hopefully, you know, right after the introduction because the illicit traders don't have the newest products.
They have only specific product. They don't have the whole portfolio. Their main muscle is price. With NPI, they don't have a muscle because they don't have access to the product. It's very limited, the NPI to specific countries and distributors. This is where we stand today with Kazakhstan.
What does it mean exactly it's illegal? Because
They take the product into the country without paying taxes. It's illegal import.
In Poland, it's the same. I mean, it's the exchange rate, and there is a huge import from Germany.
Yes, on a C status on the example you mentioned. They are free, freely circulated products into Europe. There, you need to pay taxes to get the product in. You have to pay VAT on importation. They don't. That's why the price gap.
It goes to China or Japan or India, and then someone is like.
Backdoor selling
to Kazakhstan?
They are smuggling these traders, smuggled to the country.
It's a secondary market, I believe. It's still illegal?
It's illegal to bring product in without paying taxes. That's why the government is interested to fix it.
Okay. How it's moving through the borders? I mean-
I don't know. If I knew, I would fix it.
I know. It's a huge volume, certainly. It's like, looking at your revenues, on this market, I mean, it's okay. It's okay. I mean, it's the same in Poland, but it's not.
Not the same in Poland.
I mean, it's not illegal.
Yes.
Okay.
What makes it illegal? They don't pay the taxes that the normal distributor, authorized distributor would do in the country. To be 100%, Apple decided to appoint, to register a local entity in certain jurisdictions, like Ukraine. They even import the product themselves. Yes. Kazakhstan, we do, but we pay the taxes. They check everything. Yes.
It should be easy for Apple to find out who is doing that.
They know what they sell to.
They can go by serial numbers. They can find routes.
Yeah. It happens. I mean, it should be fixable, right?
It is fixable. We believe it is fixable, and the NPI will, you know, hopefully fix it quickly. That is expected to be in September in Kazakhstan.
One last thing. The reason for this because exchange rate changed significantly, or?
Not much. That makes a difference between people purchasing different currencies. Apple doesn't adjust pricing. They do it every six months, so there is a difference. Sometimes the euro customer of Apple makes more money than the dollar. We are dollar customer of Apple. Sometimes it's the opposite. Here, the price gap is mainly due to taxes they don't pay, we do.
But, uh-
In Kazakhstan.
What has changed excluding exchange rates? Because well, somebody could have done that like two, three years ago. It's happening this year absolutely.
Maybe the product is flooding the markets. It's all over the place. Maybe they have excess stocks they flooded out, and now some suppliers will adjust production. That's one. The second thing in Kazakhstan is the government is trying to control consumer credit. They enacted a law in April that says that you guys are over-borrowed. I have to control you through the central bank controlling the commercial banks, and they make it more difficult for individuals to go buy on credit. They buy mostly on credit in this country, and this also affect the demand. That's why the huge drop in sales in Kazakhstan in Q2.
Apple does not know who in China or who in Japan is selling the products because it should be visible. You said last time that they see all the devices that are registered.
They do.
in Russia because.
They do.
They do?
They do. Of course they do.
So they...
They don't report to us really, but there is a way to control it. I don't know. Maybe the oversupply.
Mm-hmm.
Because Apple first time showed.
Mm-hmm
Lower market shares for a lot of years.
They want to sell it anyway.
Hopefully this will force them to adjust.
Mm-hmm
... supply-
Mm-hmm
fix the situation soon.
Okay.
What is the duty rate for IT import in Kazakhstan?
I don't know exactly. I think it's 24, if I'm not mistaken. I will check this. It's more than 20%. For sure it's more than 20%.
Do you expect further decline in Kazakhstan, so in Q3, let's say? Or you think it hits the bottom?
We don't expect more than the 43 we've seen in Q2. Plus, if we expect, and we do expect a positive impact on NPI, this will improve things in September.
Mm-hmm. Okay.
Therefore, I don't expect worse.
Okay
than what we've seen in Q2. Any other questions? Yes.
Maybe last one. The new iPhone is coming, I mean, in Q3. It's probably starting from Q3 or Q4, you will be selling new iPhones. I mean, what do you expect Apple to do? I think quality is some kind of new, I don't know, function, something. Do you know anything?
I'm reading articles. You do also. The last few models didn't show anything materially different from the previous one. It's like a cash cow. They just milk the product with minor additional investment. You know? Still, people are crazy to go buy the new one, and they stay on queues overnight to do so. We'll see. For sure, we know that the new product introduction, though, in Kazakhstan will change things because not everybody has access. Not all the countries have the same access like Kazakhstan does to the official distributor. This will have a positive impact on us, for sure. Now, how big? I don't know. It will.
Can you tell us a little bit more how the South Africa is developing?
It's developing well after we received first product early July, so it's too early to say.
Okay.
They are performing maybe less than expectations, but they are performing because of the Apple. They had different products, so they had strong sales. Now with Apple, it's a door open. If we open a lot of doors, surely Apple will take volumes, and this is a very big country to make volumes in. So far so good. We need a couple of-
Official distributors are there in South Africa?
They have Core Group, and now they appointed us as a second distributor.
Okay.
It's the second.
Mm-hmm. How about Greece? It's profitable?
No, it's not yet profitable. We are making a lot of steps to turn it into a profitable entity. A lot of infrastructure investments. A lot of human capital investments.
What do you need more in BrBreezy? More volume or I don't know.
We need more infrastructure still, and more sales.
With infrastructure.
You need the right software developed, localized in different countries to be able to create significant volumes of sales.
Okay. You need the infrastructure to refresh the software, let's say? Or.
Yes, we needed a lot of people in different countries to enable this business. Significant investments.
Mm-hmm.
It seems that this is a very good business to. It needs time to have the right software, the right people in the right countries. We are in seven countries already, so we'll see there as well if we are the right players into this business. It's a different business, yes. For sure, the business is a business destined to grow. That's why a lot of multi-billion investments to mostly Indian companies conducting this business with the right software. Amazon, significant acquisition of company in India and some other big investors. Especially Indian companies, that they are ahead into this business. The space is there, the business is there to grow because price difference is so big. People want to buy an iPhone for $300, $350, yes. Not all can afford $1,000+.
Yes.
Obviously there is space there to grow.
The human costs are too high at the moment, let's say, because it does need a lot of work to do the refresh, let's say. Yeah.
It seems that some companies, especially in India, do it better with much lower the cost. Maybe that's why it's profitable for them. That's why the big investments. Even the investments at the early stages, these companies didn't make money. Still they invested $billions into these companies.
They do better because in India the human capital is.
Also.
Mm-hmm.
Also.
Okay.
Yes, please.
I'm thinking about this Kazakhstan issue. One thing is import. Second one thing whether it's even more important, I mean with the consumer, the credit service, like double score for you, I believe.
That's why the 43%, it's.
Like, I mean, with the slowdown on the consumer side, they are looking for cheaper alternatives actually. They will go to the illegal traders. They will buy cheaper, actually, iPhones, right? How is on the consumer side? I mean, the Q2 was a slowdown. What's going on in Q3? How do you see-
July is more or less the same. I don't expect any lower than what we've seen. Decrease of Q2 continue in Q3. Plus we have, I said earlier, NPI September. I think somewhere we reach bottoms because we are having the whole portfolio. We have customers who don't buy two products from this. They want to see the whole portfolio from one supplier. Yes. All the benefits they get from Apple if they buy from us, that's also a side of things.
Mm-hmm. Okay, maybe I forgot, maybe that on the consumer side, on the credit side is the slowdown with credits.
They don't allow commercial banks to offer.
It's central bank.
Controls the commercials. The commercial banks are not allowed to offer so easy. They still allow, but not so easy consumer credit. They see that they over-borrowed, consumers over-borrowed, and they want to squeeze that. This is affecting demand.
This happens.
The law enacted in April this year.
Okay
is also an issue.
The economy is slowing or it's not completely.
No. No.
Okay.
Consumer credit is.
Consumer credit
is a little bit controlled. Kazakhstan is doing well overall as a country.
Can you tell us a bit more with how you managed to grow in, let's say, Poland, Western Europe? Do you need to offer better prices or what? Because the market is not so good here as well. How you do it and
We found the right segments, and we are franchised with suppliers that even big companies here are not franchised with.
Okay.
AMD, for example. Certain servers, for example.
Mm-hmm.
Yes. We found a niche where to play and make money. Yes. Grow also. We are growing healthily on sales as well. More and more we want to see growth in Central and Eastern Europe as well. We have the main distribution center in Prague. We want Czech Republic to grow as well, and we are investing in Czech Republic 'cause Slovakia is already very big. Much bigger than multiple times the size of the Czech, and Czech market is 2-3 times bigger than Slovakia. We have a lot of room to grow. You always need the right people and the right products. We are so rich.
Like not competing with the others, but rather.
Competing.
Also competing.
In Slovakia we are carrying all the brands. All the brands that the group doesn't necessarily cover, like Cisco, HP, all the server business is there for us, Lenovo, et cetera. Not necessarily we have the same full portfolio, product portfolio in other markets like Czech.
Mm-hmm.
We can do things through nearby markets because we are franchised to do certain suppliers, yes.
They don't want to give you the supplier, like the Lenovo, let's say, they don't want you to distribute.
You need to have the necessary expertise to do so, but certain brands we can take because for suppliers, a lot of suppliers, Czech is considered one market with Slovakia.
Mm-hmm.
We are allowed to sell, and they support us to sell. Now we started exploring this in Czech. We want to grow in Czech. We have about $70 million business in Czech. We want to be more than 100-120 by next year, which is feasible, which is achievable with the products we have. Same with Western Europe, we have the franchise we never explored. Now we are exploring Western Europe.
Okay, if you could, what's the main markets for the, let's say, next year? Where do you want to grow into 2025?
Africa, especially South.
Mm-hmm.
West Europe, Central Eastern Europe. MEA, Middle East is still growing, and hopefully we have better numbers in the FSU than the 25% we've lost this year.
What is the situation in iSpace, the shops? The 34, and particularly, what is now the situation in Kazakhstan? People are they are selling? They have profitability?
Profitability as a group, as a Breezy subgroup, not yet, but they are selling. The question is to sell much more, yes?
No, no, I'm asking about.
Make profits.
iSpace shops.
The retail shop, the APR stores.
Yes.
They are profitable. Of course, they are profitable. By entering this business with Apple, we tried to block other investors taking this business and also maybe backdoor competing with distributor in the country. It was a dual benefit to also apply for this retail business of Apple in the countries where we trade.
Is Apple participating in cost of new iSpace shop?
Of course. They pay for almost everything to prepare a new shop. They pay for everything. Maybe outside certain things, but the bulk is paid by Apple, you know. Because they dictate who to buy from, how the design will look like. They dictate, and they pay for it. Yeah, that's why we don't have a lot of CapEx out of these 30-34 shops, because Apple pays for it.
I'm just wondering about what you said about Breezy and the new competitors from India that they have lower cost, and they still invest $ millions in infrastructure. In this case, is there any chance you would get a competitive edge over them? It is even more pronounced question in regards to the AROS, yes?
AROS.
AROS, yes, that's right. 'Cause there are many companies that have billions of market to battle. They have broad portfolio of products. They have foundries, and they have experience. I don't know if there's any sense to continue such a strong investment in these areas.
Understand the question. Legitimate question. As I said, all this new business, the own brand that shows significant increase, the AROS, the Breezy, we are adjusting. If we see that, especially the second half, we expect much better income. If it doesn't come, we will continue to making adjustments to this business. We will not continue investing forever on a loss, you know. We made, in these 30+ years business of this group, we've made significant investments here and there, yes. You know, most of them work very well for us, some others more difficult for us. We will see and react accordingly, of course. You know, we will not stay because we have an ego to stay and excel in either robotics or in Breezy business. You know, we will do it because we will make money. Otherwise, these businesses will take significant cuts.
Yes.
Okay, regarding AROS, it was the third quarter result, yes. It was the end of 2023 when you said that they present you with the budget and prospects for 2024, and according to this, you will decide about this business and scaling back or scaling down the investments. As far as I see, they did not deliver or even they're getting worse than it was the previous years. I don't know if-
Yes, the corporate team had 40 people of these robotics experts, 19 of which were released. We are taking steps. We are not staying with tight hands. That's what I said earlier. Unfortunately, the cost saving, which did not show, so it's the opposite. We showed increased cost in Q2, and we expect to see the benefit start in Q3. Yes. This is not enough if we need at a certain point to decide whether to exit or not. That's another decision, yes. Yes.
Okay. In which quarter we should see that SG&A's growth dynamics will be lower than your sales growth?
I think starting Q3, we will see some smoothing down of these dynamics. Unfortunately, Q2 was excessive, SG&A as a percentage of sales, with lower sales of course. Also as a number, it's still very high because of these investments we've made, not accompanied with the right benefit, the expected benefits. Q3, Jakub, we expect to see some improvement in these ratios. Whether we'll be better than the sales dynamics remains to be seen, but much better dynamics in Q3 than Q2. Q2, I think, has been the worst. Then we will not see. If you see on a certain slide, we had the number of staff still increasing, less in Q2 over Q1. Still increasing. We will see flattening in Q3, for sure.
Okay. What should be the nominal savings for the third quarter moving forward on the basis of your initiatives undertaken during this-
Fortunately, not unfortunately, there is other business that still, you know, you create a new shop. You need another 22 people. Yes. You created already three shops. It's not everything else stands still, and you have 50, 60 people released already. Some of the cost saving will already show at least 50% within Q3. The business still goes on. Yes. You want to explore business in Western Europe, you still need people there. Yes. We release people that didn't produce results. There's a multiple to their cost. Yes. It's ongoing.
Have you made maybe an exercise of, let's say, standalone income statement of your own brands, putting all together what loss were introduced during the second quarter of?
Very difficult, Jakub. Very difficult. If you ship from China, for example, different products with different sizes, very difficult to come accurate on. We know for sure that on the own brands we made double digit 12, 13, sometimes 20, 30%, especially on Lorgar and other products, depending on the product itself, depending on the size for shipping purposes. Surely the own brand is much more profitable. You still worry about the inventory you manage, not the supplier, but much more profitable. But again, we couldn't make a lot of money on that. That's why we shrink the own brand to a certain extent, and now we believe there is space to grow.
What was the loss of AROS and Breezy in the second quarter and the first half?
I don't know exactly how much that was, because I repeat, we invested a lot. We kept firing, hiring people, mostly minus. We deducted on the number of staff. It's ongoing. The problem with this business is that the necessary sales and GP is not coming. It's not the cost. It's the benefit that is not there to remedy to cover the cost and make some profit. Yes. This is what we expect to see. The cost we know. Yes.
AROS loss was around $4 million, your promise?
It was almost $4 million, $3.5-$4 million last year. We said, originally we said we expect to lose much less this year, close to $2 million. Yes. Not forever. Yes. We need to decide quickly. Yes.
Good.
Yes. Same here. Guys, thank you very much for your questions. I'm outside for anything you need. Thank you for being here today.