Bechtle AG (OTCPK:BECTY) Q3 2023 Earnings Conference Call November 10, 2023 2:30 AM ET
Company Participants
Thomas Olemotz – Chairman and Chief Executive Officer
Thomas Olemotz
Thank you. Welcome ladies and gentlemen from my part. Welcome to our Analyst Conference on the Third Quarter and thus the First Nine Months of the 2023 Financial Year at Bechtle AG. Thank you very much for your interest.
The third quarter displays some similarities to the current weather conditions. Changeable, slightly cooler, but all-in-all satisfactory. Lacking the tailwind from the reduction in the order backlog, our top line lost some momentum which was to be expected. Having said that, we were able to further increase our already high margin in Q3. Considering cost pressure, this wasn’t really to be expected.
The challenging macroeconomic conditions continued to have a negative impact on parts of our business too. We will examine this trend a little more closely later in the presentation when we speak about our business performance. As usual, the content of today’s presentation is divided into four main sections. We start with a look at our business performance and the key financials for the third quarter and the first nine months of our financial year.
Afterwards we’ll be speaking about the share price development in the context of the relevant indices, some important news on what’s happening within Bechtle, and we finish up by an outlook on the remainder of the year 2023. But first the current business situation. Generally speaking we are satisfied with the overall development of the Bechtle Group in Q3.
Let me highlight two positive trends in particular. One, we continue to see high and stable demand from our public sector clients, especially the federal government sub-segment and key accounts. In particular, digitalisation projects to transform IT architectures are in demand across all customer groups. Two, incoming orders picked up in the third quarter with an increase of over 18% year-on-year.
Nevertheless, we are not closing our eyes to the fact that the current e-commerce trends continue to affect us. We are experiencing a certain reluctance to buy among many of our customers in some but not all market segments. So this situation has not changed in Q3 either.
And this is reflected in our figures for the first nine months of the year. Let’s first take a look at the development of our business volume. In Q3, business volume growth slowed down somewhat and now stands at 6%. Organic growth was 4.6%. It was to be expected that growth would normalize after the reduction in order backlog in the first half of the year.
However, at 6% we were still able to maintain a level that is above the expected growth of 3% for the IT market overall and is still in line with our guidance. In the first nine months of the current financial year, we thus grew by over 10% and thus slightly above our expectations.
Given the challenging macroeconomic environment, this constitutes a really strong performance. Our Q3 growth was driven even more strongly than in previous quarters by the positive development of our software business. You will all be familiar with the problem by now. IFRS 15 only allows us to recognize this business in the amount of our sales revenues margin.
And this is why the development here was below average, as you can see looking at the following slide. For with revenues growth of only 1%, we have only just made it into positive territory. As unpleasant as this figure is, it is not a warning signal but merely an indication of how successful our software business was in the third quarter.
And mind you, this business is also very important for Bechtle’s future strategic development. We are therefore very pleased with the high software business share. However, with growth of 6.3% for the nine month period, we are still in line with our guidance and we are confident that we will also meet our forecast for the full year, but more on this later.
At this point, let’s also take a look at revenues trends in the segments and regions. As was the case in the first half of the year, the IT system house and managed services segment was the most important growth driver. In this segment, we benefit from the high demand for projects and services surrounding the digital transformation projects of our customers. Often these are services and infrastructure projects in data centers and/or network landscapes.
In connection with this we often have software projects that are not reflected in our revenues but nevertheless make this segment very strong. In the IT e-commerce we were much more confronted with the reluctance of our customers in purely PC related infrastructure business. And in this segment, the share of medium sized customers is higher than in the sister segment. And this customer group in particular is particularly hesitant when it comes to replacement investments.
We were not able to perceive any pickup of this trend during Q3 unfortunately but it remains to be seen whether this situation will change by the end of this year. And with this we come to our earnings situation. So let’s take a look at our EBIT. In all three quarters EBIT growth at almost 6 million was on par. Especially in Q2 and Q3 we are already coming from a very high level so we shouldn’t forget that. The margin is a case in point.
The fact that we were nevertheless able to increase the margin in both quarters and thus achieved exactly the previous year’s level in the nine months period is outstanding given the challenges this year and in particular the high cost pressure.
This is due to several factors. One, as already mentioned, the demand for complex and thus usually higher margin services in the context of digital transformation remains high, leading to a disproportionately low increase in the cost of materials. Two, other operating expenses increased but at a slower rate. And three, personal expenses did not continue to grow organically over the quarters. So on an FTE basis we see that it instead plateaued.
Let’s now take a look at the earnings trends in the segments. EBIT in the IT system house and managed services segment grew by 13.8% in the period under review. Many of the positive factors like the high demand for software and services show a greater effect in this segment.
And in addition, there were higher bonus payments of the vendors in this field who pay funds for such digitalization projects and for the upstream qualification measures of their staff. In the IT e-commerce segment, EBIT declined by 3.3%. For the reasons mentioned, it has not been possible to compensate for higher costs, but there is a silver lining. We were able to grow our margin somewhat. Overall, the EBIT trends are very satisfactory.
The EBIT being up by 7.8% means that we’re exactly in line with our guidance and growth of our margin in Q3 by 40 basis points constitutes really big success. And to conclude the look at our financial, let’s take a look at operating cash flow.
Operating cash flow totaled a very strong 125.3 million in the third quarter. The positive trend of the two previous quarters, therefore, not only continued but intensified. The year-on-year swing is over EUR150 million and thus serves as a clear indication that the measures we took to optimize cash flow have shown a lasting effect. We are seeing improvements in two areas in particular.
First of all, we continue to succeed in reducing inventories. Yes, we are still at a relatively high level, but as a result of optimizing our inventories, we did see a swing of EUR41 million in Q3. Secondly, when it comes to trade receivables, we see some success of our newly established centralized receivables management.
The swing here was almost EUR35 million in the third quarter. So conclusion, we are making very good progress and do not need to worry about Bechtle’s financing capability. And with that, let’s take a look at headcount trends.
As of September 30, 2023, Bechtle had 14,840 employees. That is an increase of 1,051 people, or 7.6% more year-on-year. 518 of the new colleagues joined Bechtle by way of acquisitions. That is almost 50% of the total increase.
Organically, the number of employees grew by only 3.9%. And this moderate growth continues to be a deliberate entrepreneurial decision. In times of economic fluctuations, Bechtle does not want to overdo personnel costs. If we wanted, we could hire more people, despite the shortage of qualified staff. And by the way, this is reflected in a record number of job applications.
In October, we have reached the mark of 5,000 applications in Germany alone. A most gratifying development here is that almost 30% of applicants are women. The usual share in our industry, by the way, is between 10% and 20%.
In this area, too, we are making headway, a clear result of our successful employer branding, for sure. Ladies and gentlemen, that takes us to the share price development. Stock markets are still very nervous, which is reflected in the high level of volatility. Due to the high level of uncertainty, there is a clear trend to invest in large caps, whereas small and mid-caps quite often are ignored.
But you know that better than we do. This is reflected not only in our Bechtle share, but also in the indices in general. With the year-to-date increase of almost 33%, our share shows overall a very positive development. Furthermore, we clearly outperformed the indices in the course of the year.
And yet, since February, our share price stuck in a sideways movement around EUR40. After a temporary high in August that took the share price over EUR45, the share price went back again at the end of October. At any rate, our performance, in particular against TecDAX and MDAX, goes to show that we continue to be well positioned on the capital market.
Reliability, solidity, and resilience are greatly appreciated in uncertain times, in particular for publicly listed companies. That takes us to some additional bits of news beyond the facts and figures, which, however, are of great relevance for our company. These latest news impact three areas that are very important for us.
Our employees and our commitment to the training of young people, our M&A activities in the context of our internationalization strategy and quite unusual at Bechtle a succession in the executive board.
But one thing at a time. Let us start with our new trainees and students. Bechtle started the academic year with an all-time high of 299 new vocational trainees and dual-study students. Group-wide, 865 young people are learning the ropes across 13 technical and commercial professions as well as in 10 different university courses.
The range of professions was also extended with the addition of a bachelor’s degree program for sustainable management and vocational training in marketing communication. Training was and continues to be important for Bechtle. And in view of the shortage of skilled staff and the well-known demographic changes, training remains at the top of our agenda.
Let us look at our M&A activities. Well, it didn’t come as a surprise, but we were still very happy to announce the completion of our acquisition in France. Well, quite briefly to remind you, we focus on Apixit for two reasons. First, Apixit has 10 sites in France and is thus ideally positioned to be close to the customers even in the largest country of central and western Europe.
Secondly, admittedly, Apixit is a classical system house, but even today almost 50% of its revenue is generated in the future proof segment of security. The second acquisition is rather untypical of Bechtle. First, because we don’t acquire 100% of the company as we usually do, and secondly, because we position ourselves early on in the context of AI, with the Planet AI.
It is very important for us to play a decisive role in the future relevant topic of AI. With our investment in Planet AI, we have taken the first visible big step in this direction. And finally, a personnel matter which is particularly relevant for Bechtle’s future.
Changes in the Bechtle Executive Board were rarely announced in the past, different from other companies. A fact that was always seen very positive. In fact, since 2009 i.e. for 14 years, the same Bechtle Executive Board has been successfully managing the company. This consistency and reliability is exactly what characterizes us. Now, however, a first aid-related change is imminent.
Jurgen Schafer, a true Bechtle veteran, is going to retire next year. He joined Bechtle in 1988, and ever since, he left his mark on the company. We are very happy to have found an ideal internal successor with Konstantin Ebert. Effective on January 1st, 2024, he will take on responsibility for the IT e-commerce segment and he will continue to be responsible for internationalization.
Let us now look at the remaining months of 2023, to do some crystal gazing, so to speak. And I have deliberately chosen the image of the crystal ball, because rarely before has it been so difficult to assess somewhat reliably what the future will bring. You all know how great the uncertainties currently are. There is no sign of any easing of the tension, and the geopolitical situation provides not really any hope for it.
But still, our customers have to invest in their IT. And most of them, in fact, actually want to invest. The reluctance to invest in larger infrastructure projects will come to an end. That much is sure. However, no one can reliably predict when this is going to happen, maybe to some extent already in the fourth quarter, but more noticeably probably in the first or second half of 2024.
The general trends in our business, however, remain unchanged. Digitization drives our customers. Security plays a central role. But also topics like modern workplace or cloudification stimulate our business. In the mid and long-term, we can quite rightly be more than optimistic.
Despite the tight economic situation overall, we at Bechtle see first signs of improvement even today. Order intake rose, as mentioned before, year-on-year by 18% in the third quarter, which we perceive as first positive signs.
The outlook for the fourth quarter won’t be overly optimistic. However, within the range of our growth forecast, 5% to 10%, a lot is possible. That is why we confirm today our forecast for the full business year. Once again, we want to considerably increase business volume and revenue as well as EBIT.
EBIT margin is to be around the previous year’s level. So thank you very much, ladies and gentlemen, on the development in the first nine months, 2023, and an outlook on the remainder of 2023. Thank you very much for your attention.
Question-and-Answer Session
End of Q&A
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