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Edited Transcript of DUST.ST earnings conference call or presentation 9-Oct-19 7:00am GMT

Full Year 2019 Dustin Group AB Earnings Call

NACKA STRAND Oct 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Dustin Group AB earnings conference call or presentation Wednesday, October 9, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Johan Karlsson

Dustin Group AB (publ) - CFO & VP Finance & Business Support

* Thomas Ekman

Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain

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Conference Call Participants

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* Daniel Thorsson

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

* Ramil Koria

SEB, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Q4 report '18/'19 conference call. (Operator Instructions) I must advise you that this conference is being recorded today, Wednesday, the 9th of October, 2019.

I would now like to hand the conference over to your speaker today, Thomas Ekman. Please go ahead, sir.

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [2]

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Thank you very much, operator. Very good. Good morning, everyone, and most welcome to our fourth quarter presentation and conference call. I hope you have had a good morning so far.

Here on our side of the call is myself, Thomas Ekman; and we have Johan Karlsson, CFO; and Fredrik Sätterström, Head of IR, in the room as well.

So today, we present our fourth and last quarter ending our fiscal year '18/'19, a very interesting and transformational year for us, where we have put a lot of effort in increasing service sales and building capabilities for that, developing our online platform as well as developing our speedy integration of acquired entities. But let us come back to that and go through the quarter more in detail.

First, just to give you a short glance of Dustin, going to Slide 2. Many of you know us, of course, but just a quick run through of who we are. Dustin is a leading IT e-retailer with a wide range of hardware, software and services. We have centralized warehouse and efficient logistic platform that can ensure fast and reliable delivery to our customers. With the addition of high-level IT expertise and competitive pricing, it enables us to meet the needs and demands of small- and medium-sized businesses as well as large corporate, the public sector and also consumers.

95% of our business is B2B, and 5% is B2C. 44% of sales come from Sweden, and 14% through 20% comes from Norway, Denmark, Finland, respectively, (sic) [Finland, Norway, Denmark, respectively] and now 7% from the Netherlands. We have roughly 255,000 products in both hardware and software in our assortment. And 80% of our sales is coming from online. The remaining 20% are sold through our strong relationship sales forces. Overall, we are well positioned in the market, and we are benefiting from the underlying trends such as accelerating online market, demand for mobility, managed services, security and cloud-based solutions.

So moving on then to Slide 3 for some highlights during the quarter. Continued strengthened market position during the quarter as well as investments for increased profitability. Net sales grew with nearly 20% to SEK 3.026 billion, where organic growth was 11.2%. The growth was fueled by positive organic growth in all segments as well as completed acquisitions. Of the organic growth, SMB came in at 2.3%; and LCP, at 20.8%; and B2C, at 0.7%.

Even though the market has been somewhat worried during the quarter with overall negative growth in the Nordics, it is good to see that we keep our growth premium versus the market, especially on SMB. LCP continues to benefit from the large public deal in Denmark as well as the positive development in Norway. And B2C, I should say, is continuing according to strategy.

Gross profit increased to SEK 489 million compared to last year's SEK 417 million, gives us a gross margin of 16.2%, slightly down from last year's 16.5%. Our adjusted EBITA rose with 1% to SEK 120 million, more or less in line with last year's SEK 119 million, giving us an adjusted EBITA margin at 4% for the quarter.

The EBITA margin grew sequentially, a little up from Q3 but down versus last year due to mix effects and additional resources that we've put in, in our service organization.

Net profit for the quarter was SEK 73 million, up 3% from last year, giving us an earnings per share at SEK 0.83. And our net debt ratio is at 2.9x. And cash flow from operating activities at SEK 71 million compared to last year's SEK 59 million.

Other operational highlights in the quarter is our ongoing consolidation of our Nordic data centers, where we'll go from 14 sites to 4. We're also continuing in our automation of central warehouse outside Stockholm, expected to be ready in Q4 2020. And worth mentioning is that we, as per September 1, have integrated Saldab into Dustin, our so far largest integration. And we are preparing for a Dutch online launch, but more on that on those bullets later on in the presentation.

Now Johan, you can take us through the segments, yes?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [3]

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Yes. Moving to Slide 4 and some more detailed numbers on the SMB segment to start with. Sales in the SMB segment ended at SEK 1.353 billion, a total growth of 17.2% for the quarter, of which 2.3% was organic in constant currency. As Thomas mentioned before, we saw a slowdown in the Nordic market demand that affected the organic growth. However, with that market development, we continued to generate a premium to the general market development and, hence, gaining market share.

Segment profit was SEK 135 million, up from SEK 132 million last year. This resulted in a segment margin of 10% compared to 11.4% for Q4 last year. Compared to Q3, margins were flat at 10.0%.

We continued to invest in sales and delivery organization, systems and processes for service and solution, and that continued to affect profit and margins. As service volume increase, this will have a reduced impact on result over time. As a result of investments, we saw the Software-as-a-Service customers in the quarter grew by 41%. And the share of software and services sales increased from 20% last year to 29% this year.

Moving on to Slide 5 and the LCP segment. The strong sales development continues in the LCP segment. Total sales for the quarter was SEK 1.531 billion or a growth of 24.4%, of which 20.8% was organic in constant currency. We saw the Danish sales continuing with strong growth but also supported by good development in Norway.

Also in LCP, we saw some effects from the more cautious market climate where the slow PC market development in Finland affected our numbers. Segment result amounted to SEK 80 million, up from SEK 74 million last year or 7.4%. Segment margin ended at 5.2%, which was down from 6% last year but up from 5.0% in Q3 this year. The high share of public sales compared to corporate sales in the quarter affected margins negatively.

Moving to Slide 6 and the B2C segment. Sales in B2C ended at SEK 142 million, which was 1.7% above last year, of which 0.7% was organic. Segment profit at SEK 7.1 million compared to SEK 7.2 million last year. Segment margin was 5.0% compared to 5.2% last year.

Our strategic focus on margin continues, and the pricing discipline is strong. In total, the segment represents approximately 5% of sales, and the main reason to sell to consumers is to understand the market trends and get access to a broader assortment.

Moving further to Slide 7 and net working capital. So net working capital at quarter-end was negative SEK 68 million compared to negative SEK 192 million last year. And if we look at the components, accounts receivables are moving with the growing sales numbers, and we do not see any major change in payment terms or payment discipline. Accounts payables continues at high levels due to the prolonged payment terms from some large suppliers.

Inventory, at SEK 465 million, is SEK 70 million higher than last year mainly due to more sales and wider assortment in the private label. In addition to that, we had more customer-specific stock for large rollout this year compared to last year. All in all, we remain at low levels of net working capital, and we have now 8 consecutive quarters with negative numbers.

Moving to Slide 8 and cash flow. Total cash flow for the quarter was SEK 54 million compared to negative SEK 121 million last year. Looking at the individual parts, we see that cash flow from operating activities, excluding change in net working capital, was SEK 93 million compared to SEK 97 million last year. Change in net working capital was negative to cash by SEK 22 million this year compared to negative SEK 37 million (sic) [SEK 38 million] last year.

We saw low activity in investments this year and ended at SEK 17 million compared to last year, where Vincere was acquired at SEK 739 million. In line with the investment activities, the financing activities were also low in the quarter. Last year's numbers were affected by the new bank agreements.

Moving on to CapEx. And total CapEx for the quarter was SEK 18.9 million or 0.8% of sales. CapEx related to IT platform was at SEK 6.5 million compared to SEK 5.1 million last year mainly as a result of the work done to launch the platform in the Netherlands. Other CapEx decreased from SEK 17.1 million last year to SEK 10.2 million this year. These investments are mainly done in the IT hardware for our service production and some investments in office facilities.

Back to Thomas.

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [4]

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Good. Thanks Johan.

And then continuing then on Slide #9. As you noticed before, we are on a transformation path to go from selling products to sell products and services. In order to do so, we are investing in capabilities and competencies, and we are setting up a central sales and delivery organization for our service and solutions in the Nordics.

We now had 29%, as Johan mentioned, our sales from software and services, and we are accelerating our pace in integration of our acquired entities to make full use of the skills, continue to develop our offering, generate economies of scale in our central services organization. And by integrating, we mean both from organizational perspective, system as well as brand perspective. Everyone becomes Dustin, you can say.

In order to further be more cost efficient as well as delivering a better customer experience, we are optimizing our structure for our data centers and sites, where we are consolidating from 14 down to 4. With 4 centers, we can keep the local presence and still deliver a more efficient solution both for ourselves but also for our customers.

To that, we are -- as you know since before, we are automating our central warehouse outside Stockholm by setting up a robot system, and that will prolong the cut-off time so that customers can place their orders longer times during the day with roughly 1 hour as well as increase our productivity. Expected CapEx for that is SEK 50 million, and we also expect it to be done in Q4 2020.

Moving over to Slide 10 and preparations for the launch in Netherlands. As said earlier and as we have previously talked about, we see a very good opportunity to launch our online platform in the Netherlands. We see that we can provide a strong value proposition in the market with our high competence in IT, our service levels and accurate deliveries to primarily SMB. As an effect of our B2B launch, we will also be able to provide a wider assortment and focused offerings also to the B2C. However, that as you know, our B2B is our primary focus.

The Dutch market has many similarities with the Nordics with a high number of small SMBs. We have the second highest online penetration in the EU as well as developed logistics regarding speed, flexibility and reliability. And after all, Holland is a flat, fairly small country with a lot of people, so it is a very good market for an online player like us.

We plan to launch later this calendar year. And we have also just installed ourselves in our new warehouse in Veenendaal in the middle of Holland. A launch like this comes with some costs related to it. And apart from what we have taken this quarter, about SEK 4 million, you should expect further expenses at around SEK 10 million evenly split between CapEx and items affecting comparability. As everything we do, this is, of course, very exciting, and we look very much forward to the launch later during the fall now.

Moving on then to Slide 11 and closing in on our 2020 targets for sustainability. We grow and we are becoming bigger, and with that comes, of course, an even bigger responsibility. 4 years ago, we set our targets on 5 different areas. And with 1 year to go on that plan, I would just like to give an update on those.

First, we have responsible use of resources. And our target here is to help our customers to take back products that they no longer use so that we either can recycle them or resell them. And here, we see that 90% of the products we take back is resold and reused primarily to schools. And this started off quite slow, but as you can see in the number, it has really taken off during the year, where we recovered 83,540 products and in total, already beating our 2020 target with an accumulated 147,828 units. So that's very good.

Next one is we set up a target of reducing our climate impact, where we want to decrease our CO2 emissions with 40%. We are slightly behind at the moment due to strong growth but also the companies we acquire, but we work hard on managing this. Also worth mentioning is actually when we acquire a company, that company as such improves a lot. Usually, they have higher CO2 emissions than we have. But when we acquire them, we can put them into our model, and that in itself reduce actually the climate impact for that company. So while it's done, you can say that the more we buy, the better for the world.

Over to the third, responsible manufacturing. Since introducing private label, we have increased our efforts in this area, and we have also increased our scope for audits of partners and factories. We have a solid program in place how to audit, how to work closely with our vendors and how to take more responsibility. And this will definitely help us closing in on this target.

On diversity and equality, we have made several improvements during the year especially on management level, where we have a more equal set of managers. Some of you might also have noted that we were highlighted in the Swedish Allbright list that came out this week, and we are now working our way up on the green list on that list.

And last, business ethics is at 100%. And we also have got now 99.6% of all our partners to sign our Code of Conduct, which is very good. And given that the sustainability area is not only a vital part of our strategy, we are aiming in all ends to have a sustainable strategy. The more we can do for our customers when it comes to sourcing the right products, sustainable products, right services, the better for the customer. So the more we do, the better for everyone. And you should also look forward to this year's annual report that will be a complete and audited combined annual and sustainability report.

And so moving on to Slide 12. And before we go -- finally, before we go into Q&A, let me just summarize the year '18/'19. A good year, somewhat bumpy, but on a total level, we grew 21.7% to SEK 12.536 billion. Group organic growth at 9.9%, where SMB grew organically 4%; LCP, 16.5%; and B2C declined 3.9%.

Gross margin increased to 16.7% from last year's 15.9%, positively affected by a more favorable sales mix with higher share of services and solutions and, worth noting, a very good sales of our private label products.

Adjusted EBITA grew 11.8% to SEK 560 million, up from last year's SEK 501 million. Adjusted EBITA margin ended at 4.5% versus last year 4.9%, where it was impacted by sales mix and investments in our future.

Earnings per share and before dilution increased to SEK 4.12, up from last year's SEK 3.91. And last but not least, we also welcome the Danish Inventio.IT, Dutch Norisk and Finnish Chilit to our family.

So all in all, eventful year with organic growth, acquisitions, investments in our online platform as well as our service organization for improved and increased profitability.

And before concluding, I also want to thank -- take the opportunity to thank everyone at Dustin for a strong contribution and, of course, our shareholders for believing in us, the company and the prosperous future we create.

Thanks. And by that, we conclude our presentation, and we are happy to take any questions you might have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Daniel Thorsson.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [2]

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Daniel from ABG. First, a question on Netherlands. Can you say something about the organic growth you had seen in Vincere during the first year as a whole there?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [3]

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The organic growth in the Netherlands are, give or take, the same numbers as we have seen in the Nordics. They, of course, had a slightly different mix between SMB and LCP, but there is no clear difference between the Netherlands and the Nordics. Market seems to be slightly stronger in the Netherlands at this moment.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [4]

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Okay. So the organic growth in Vincere for the first 4 quarters has been around the 10% you see at group level?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [5]

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Yes.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [6]

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Okay. That's good. And then a question on SMB. We see the share of software and services increasing quite rapidly from 20% to 29%, but margins are still under pressure. Do you see any price pressure for the hardware side of it?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [7]

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Well, I think what we have said is that in a weaker market that we've seen at least in the last quarter, you will see some effect on the margins as well as on the volumes. So there is pressure, of course, on the margins on our hardware business when volume in the market is slightly lower than we have seen before.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [8]

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Okay. And a follow-up on the margin development. Has the recent quarters been in line with your expectations and the plan ahead of the '21/'22 6% margin target? Or has this changed your longer-term view in any sense?

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [9]

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No, it has not changed our longer-term view. It hasn't. And we knew -- in the plan we have, we, of course, saw that we need to take investments in order to come to that level of margin where we want to be, at between 5% and 6%. So it hasn't changed. I mean it's also, of course, adjusting somewhat, as Johan mentioned, to changes in the market, but we also see that, that can push -- put a short-term pressure on the hardware side. But overall, we see -- we do not see that we changed anything in our look ahead for '21/'22.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [10]

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Okay. But the last 2 quarters, had they been below your expectations a year back or in line with your expectations?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [11]

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On total level, they are below, but mainly that comes from the very strong share of growth coming from the LCP. And we all know that, that is a little bit more cyclical than -- or seasonal when we gain the larger contract. So we are just in a period now when the share of LCP growth is very strong. And that, of course, hampers a bit the margin development on the total level. But over time, that will not have a significant impact, no.

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Daniel Thorsson, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [12]

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Okay. That's good. And then just a final one. You referred to the IDC, the data for hardware market in Q2 was negative. Have you seen any data for Q3 so far?

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [13]

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No, not yet. Not yet. But we -- probably what we can see from the market is it remained probably the same, but we'll see what comes out of that.

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Operator [14]

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There are no more questions at this time. Please continue.

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [15]

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Okay. Very good. If there are...

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Operator [16]

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Sorry, excuse me. There's just a couple of questions more. Sorry. If that's okay.

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [17]

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Okay. Go ahead.

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Operator [18]

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Okay. First one comes from the line of Mikael Laséen.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [19]

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Yes, a few questions from my side on the margin for the SMB segment. Can you elaborate on the impact you had from the delivery organization and the increased organization that you have, acquired EBITA maybe, if you can say something about that, and the impact from private label initiatives, so in total, the dynamics around those areas?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [20]

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I think if we start by the investments that we're doing in the platform, they are, of course, you would say, on a quarterly basis, relatively large compared to last year. That includes, yes, products, service, management organization. It includes the development of new offerings, new systems to handle services and solution sales and invoicing. So they are, at this moment, with relatively few of the acquisitions integrated so far, meaning that relatively low volumes using that platform are, of course, not up to scale at the moment, and that will affect the margins and the profitability over the next -- our estimate would be the next 2 to 3 quarters, and that I think we discussed also in the Q3 report.

In terms of acquisitions, they are contributing at the level which -- what we expected, so what we have communicated. We don't comment on the individual acquisitions. But as we have set the plans for them, they are contributing in line with that plan. I think both Chilit and Inventio had a good start in the Dustin family as well. Of course, the Q4 for the service entities are not the strongest quarter given the fact that part of their delivery is including installations and, let's say, consultancy work or manual work which is not done a major part of July. So that Q4 is not a very strong quarter for them, but they still contributed to our result. What -- there was one more area?

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [21]

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Yes, private labeling impacts.

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [22]

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Private label, again, we set out the plan almost 3 years ago now. We said we were going to get, over time, SEK 400 million sales and 10% EBITA margin improvement. At the moment, we are doing, let's say, better margin improvement than we thought, and we are doing slightly less sales of private label. Mainly that has to do with the fact that we are selling products in segments where turnover is not so high or the products are not so expensive but margins are higher. So we're selling basically more cables than more expensive products. And that gives us, at the moment, the right profit or actually slightly more profit coming from private label than we expected in our plans 3 years ago, but we are exchanging a little bit less sales but with good -- still with good development. And as we said commenting on the inventory, we are adding to the assortment quarter-by-quarter. So I guess we see a pretty good development also the coming year coming from the private label side.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [23]

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Okay. Excellent. That's helpful. And going forward, can you maybe say something about how we should expect these things to impact margins? Would it be slightly lower drag, so gradually? Or anything else that could impact the margins in Q1, Q2, for example, Netherlands, the online launch there, things like that?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [24]

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I think what -- I mean there are 3 components to it. I think the service and solutions side, as Thomas was saying before, as we are integrating more and more entities to the platform, we will see better margin coming from that side. And that's a gradual process. It will be -- over this year, it will be 5 companies integrated into the platform. And the more we do, the better the result will come from that.

Obviously, launching the online platform in the Netherlands is -- let's say, puts some pressure on the margins when it comes to online sales because we don't expect a positive result from that launch in year 1. For sure now, that will cost us a little bit on the profit side. And then, as we have now seen 2 quarters of slightly weaker market -- or at least the last 4 or 5 months, a slightly weaker market, that also affects a bit the margins in the quarters. But as we've said before, the weak market, from an experience side, would put effects on us for maybe 2 to 3 quarters. After that, the SMB customers will come back and start buying things again because -- again, because they need to, because they haven't really planned for anything. So they need to buy a new computer, or they need to buy new equipment. So that, I think, is the combination of these 3 things on the margin side on SMB.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [25]

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Okay. So that boils down to, I mean, more or less unchanged EBITA margins for the SMB segment in the near term?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [26]

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Yes. Yes.

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Operator [27]

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Next question comes from the line of Ramil Koria.

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Ramil Koria, SEB, Research Division - Analyst [28]

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Just first off, a clarification here. Are we still -- picking up the LCP sales bit, are we still 2/3 public and 1/3 large corporates?

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [29]

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Yes. More or less, yes. That's true.

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Ramil Koria, SEB, Research Division - Analyst [30]

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And is it possible to sort of elaborate a bit on -- if we're looking at the public side, you've spoken about -- well, in this quarter, you said that -- if I'm not mistaken, that Norway's performing fairly well. But in previous quarters, you said that Denmark and Finland are seeing some fee pressures. Is it possible to sort of, to the best of your ability, quantify the difference in EBITA margins across the markets and possibly also how you sort of -- how were you able to mitigate price pressures on one market by taking on contracts in another? Is that even possible?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [31]

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I think we can comment on it on a general level saying that we don't see any major differences in margin potential in the different Nordic countries. What you see in practice is that you have different timings of different -- on the different contracts in the different countries. So if we are in a new contract in Denmark and we are in more mature contracts in Finland, you will see a difference in margin. But that is not due to the different countries, it's more on the timing of when you sign the contract. And so you cannot say that Norway has a better margin than Sweden, for example. That doesn't -- that's not the case.

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Ramil Koria, SEB, Research Division - Analyst [32]

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I think in the Q2 report, you said that the large Danish LCP contract, it has, say, 1% EBITA margin in the first year and then 2% in the second year. I mean is that valid across all Nordic markets, or am I mistaken here?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [33]

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It's valid in -- if the size of the contract is the one in Denmark, you would see the same margins in the different Nordic countries.

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Ramil Koria, SEB, Research Division - Analyst [34]

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Okay. And just very briefly on central functions. Obviously, coming in lower than expected in this quarter. Now that Saldab is integrated as of Q1 next fiscal year, is it possible to say sort of how much of the central function costs in Saldab that will flow through to central functions from SMB?

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Johan Karlsson, Dustin Group AB (publ) - CFO & VP Finance & Business Support [35]

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I would say relatively no -- low numbers. You would not see a main -- major difference in the central cost percentage of sales next year due to that.

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Operator [36]

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There are no more questions at this time. Please continue.

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [37]

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Okay. Thank you very much, everyone, for listening in today, and have a continued great day, and talk to you very soon again. Thank you very much.

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Operator [38]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.

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Thomas Ekman, Dustin Group AB (publ) - President, CEO & Acting VP of Supply Chain [39]

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Thank you.