Careium AB (publ)

STO:CARE

Earnings Call Transcript 2022-Q2

[Carl-Johan Zetterberg Boudrie, executive]

Thank you very much. I hope I'm loud and clear. Good day, everyone, and welcome. Today, we are to present Careium second quarter result for 2022. And as mentioned after the presentation, we will give you an opportunity for a Q&A session, and you also have the opportunity to write questions in the digital chatroom.

Together with me here today, I also have our CFO, Matthias Carlsson. We can take next slide, please.

Quarterly highlights for the second quarter for Careium. The positive sales development continued for us in the second quarter, achieving the second highest quarterly sales in a single quarter, only beaten by the first quarter of this year, which results in a record first half sales. We continue to take market shares in the Nordic region after a several contract wins in Sweden, both new and existing contracts, reaching a new all-time high number of connections in the region.

The demand for digital solutions continued to increase in the second quarter with strong product sales, which is an evidence of the digital transformation phase starting to pick up in the United Kingdom. The restructuring initiative that was initiated during the fourth quarter have continued with activities in the second quarter to improve service delivery, quality and efficiency. But financially, the transformation has still burdened our profitability in the second quarter. But we are still confident that we will achieve our targeted improvements by the end of the year and a strong focus to restore profitability for the group through the ongoing transformation in United Kingdom as well as initiatives for improved profitability throughout the rest of the group.

Next slide. Let me give you some more information regarding sales and gross margin for the second quarter. Net sales in the quarter was the second highest in the history of Careium, with sales in the quarter equaled SEK 174.4 million, which is an increase of 19% compared to the same period last year. And for the first 6 months, sales equaled SEK 353 million, which is 24% above the same period last year.

It's positive that a good sales growth continued in the second quarter and across all our main regions just as we saw in the first quarter. And also, we continue to see growth in both products and services. Also organic growth was at a good level of 8.2%, especially in the Nordics, we saw strong organic growth in the quarter. Sales of services increased by 16.1% to SEK 132 million where the number of new contracts implemented in Nordics and the acquisition of Innocom in the third quarter of last year. All those slightly below the first quarter due to lower service sales in the United Kingdom. Sales of products was SEK 42.2 million (sic) [ SEK 42.4 million ], which is an improvement of 28% and also above the first quarter this year, which is driven by good growth in United Kingdom as we start to see increase in sales of digital equipment. The digital shift in the region is increasing its pace.

The gross margin was 37.4% in the quarter, which is a bit lower than the level that we've seen in recent quarters. We've been burdened by higher cost of goods sold due to freight and components and also high service delivery costs, especially in United Kingdom, to ensure we maintain service levels throughout the quarter during the transformation. The number of connections increased with 9% to 401,000 connections, which is the same level as the first quarter of this year.

Next slide, please. The market highlights, starting with Nordics and United Kingdom. Nordics had its continued good development also in the second quarter as we saw in the first quarter this year as well. Sales increased 17% to SEK 81.3 million, driven by implementation of new contracts in Sweden, where we continue to take market share through new contracts, contract wins. Also normal increased sales in the quarter compared to the same period last year as well as compared to the third quarter of 2021. Cost of service delivery in the region have been impacted by the pandemic, especially with high sick leaves and over time as a result of this. And especially the first part of the quarter. We have managed to maintain a high service quality level that we have in the audit region. Number of connections equaled a new all-time high of 130,500 connections in the region for the quarter, which is a good growth of 5.2% in number of connections and also up from 128,900 in the first quarter this year.

In the United Kingdom, we grew our revenue with 6% to SEK 67.4 million despite the ongoing restructuring of the region and challenges in our service delivery, especially in products, we saw good sales in the quarter with increased deliveries of digital equipment and the digital shift is starting to accelerate in a region. This resulted in product sales increasing by 83% in the quarter compared to last year, but also a solid increase compared to the first quarter of 2022.

Connections in the region equaled 241,900, which is a slight decrease of 0.9% compared to the same quarter last year as we have faced some challenges in our service delivery and service business as a result.

Next slide, please, and continue with some market highlights for Central Europe and our other markets. Sales in Central Europe also showed good increase in the quarter of 103%, with sales equaling SEK 24.2 million compared to the same quarter last year. The sales increase is predominantly the result of the acquisition of Innocom we did in the third quarter of last year, but also a good and maintained market position in Germany.

With our service -- Software-as-a-Service platform we target to go live with the first larger external customers in the Central Europe region during or towards the end of the third quarter. We have received good feedback from a number of customers, especially in Central Europe as we presented and demo-ed our new Software-as-a-Service platform. The number of connections at the end of the period in Central Europe was 28,600 which is an increase also from the first quarter where a number of connections equal 28,300.

Other markets decreased by 18.8%. But from small numbers with sales equaling SEK 1.5 million. And this is a result of slightly lower product sales in France.

Next slide, please. And looking at profitability for the second quarter. The profitability in the quarter is, of course, significantly impacted by the restructuring we are committed to succeed with in the United Kingdom. And also, to some extent, effects from increased cost of goods sold and higher cost of service delivery impacting the gross profit margin.

Adjusted EBITDA amounted to SEK 32.2 million. This includes SEK 27.8 million relating to the revaluation of estimated additional purchase price for the acquisition of Victrix as well as restructuring costs and other items impacting comparability, both mainly from the ongoing restructuring in the United Kingdom. The software platform and the Victory software platform, we did a revaluation, it's now becoming an important part of our offering. Our offering internal offering and to be one of the core elements in our services that we developed, but also as the service of its own to Software-as-a-Service. But its commercialization has been delayed compared to the plan at the time of the acquisition, which have affected the additional purchase price consideration. And as a result, revaluation have been done in the quarter.

Adjusted EBIT amounted to SEK 14.1 million compared to SEK 6.2 million in the same period last year. Operating profit EBIT adjusted for restructuring costs and other costs impacting comparability, including the devaluation of Victrix was minus SEK 6.9 million, which is mainly burdened by the ongoing restructuring in the United Kingdom.

What we did see in the quarter as well was, I would say, constant improvement throughout the quarter after a bit tougher start in the quarter in general. And as we mentioned, we did see negative effects from COVID in the beginning of the quarter, especially in the Nordics. We've seen a gradual improvement in the quarter with a stronger finish of the quarter than the beginning of the quarter.

Let's take next slide, please. And to give you some update on U.K. restructuring as well as our focus on making sure that we restore profitability for the group. As we communicated during the first quarter of last year, we have initiated a significant restructure of our United Kingdom operations. Unfortunately, we've suffered from local management historically, not in sort of managed to integrate and build a strong business for us in the U.K. that we are now committed in making sure we accomplish and get back to a profitable and strong business being ready to become the leader in the digital transformation in the United Kingdom.

In addition to the transformation program, we have identified and initiated initiatives to strengthen the profitability throughout the group and for the group in total. This includes measures both to improve gross profit margin as well as reduced operating costs. Including the U.K. restructuring, we expect to increase our operating profit from current levels by SEK 60 million to SEK 80 million on an annual basis with total transformation costs of SEK 25 million to SEK 30 million.

Next slide, please. Cash flow in the second quarter. Cash flow from current activities during the quarter was SEK 10.3 million, which is a clear improvement from the same period last year and mainly due to a positive change in working capital. Free cash flow in the quarter amounted to minus SEK 3.9 million. and our net debt amounted to SEK 167.1 million at the end of the second quarter.

Next slide, please. And a few concluding remarks. It's that we've seen a continued strong sales growth within the business and good organic growth -- it's also positive that the growth is, I would say, across all parts of the business. its growth within all our main regions and its growth both in products and in services. We continue to take market share in the Nordic region, especially in Sweden, where we won a number of new contracts and retain the number of existing contracts in the quarter and where we in the Nordic region continue to sort of hit new highs for the number of connections that we have.

Also positive that we see the demand for our digital offering in the United Kingdom is strong and that we see the digital transformation is starting to pick up pace, where we saw strong growth of product sales in the United Kingdom in the quarter and also continued growth quarter-over-quarter in product sales and digital product sales in the region. From a sort of challenges perspective, of course, the U.K. transformation is a challenge, it's progressing as we expect. We are confident that work that we're doing in the United Kingdom, where the big focus in the second quarter to lay a strong foundation for service delivery quality and service delivery efficiency will result in the improvements that we target.

But it still have had a significantly negative burden on the operating profit for the second quarter for the group. Of course, we will still continue to see increased costs for components. And also, we've experienced some increasing cost for service delivery. Also excluding the United Kingdom and sort of the big transformation work and we're committed to in the region. But also, as mentioned, we did see and we did face challenges due to COVID in the beginning of the quarter, especially in the Nordics.

Our focus ahead is, of course, to finalize the transformation program and improve quality and efficiency in the United Kingdom. Together with working on other identified group initiatives to restore profit and improved profitability in both United Kingdom and in the group as a whole. And this, of course, in line with our strategy where we are committed to continue to carry out the fine strategy that we have with the purpose and aim to be the true market leader in technology-enabled care in Europe.

Okay. Thank you very much for listening to our summary of the second quarter. And I now open up for Q&A session.

[Operator]

[Operator Instructions] Since there appears to be no questions. I would now like to turn the call back over to Mr. Zetterberg Boudrie for any closing remarks.

[Carl-Johan Zetterberg Boudrie, executive]

Thank you. And actually, we do have a few questions here in the digital chat room that we cover. The first question is, in Q4 '21, accounts receivable to report a high share of accounts receivables being overdue more than 60 days. How has this developed since when taking these flights into account?

I think as sort of evidenced in the report, we have seen a clear improvement in receivables and especially in overdue receivables. And we collected a lot of the overdue receivables equally sort of take into account the write-down as mentioned. So I would say receivables then precluding cash collection and overdue receivables are significantly improved both in the quarter and during the first half of the year.

Second question is relating to services in the U.K. The quarter we're looking at the services sales decline in U.K. and Ireland. How does this impact your outlook for this region going forward as a sales driver for the company. It is true that we did see a slight decline in number of connections in United Kingdom in the quarter and also a slight decline in services sales. There is sort of hugely correlated to some of the balances we faced in service delivery, quality and efficiency in the last sort of -- or during this year. But we do see an improving trend in both quality and efficiency and we're confident that we'll continue to do so throughout the rest of the year. Why we still believe U.K. and Ireland will be one of the clear growth drivers for the company going forward, both because of a market with a lot of opportunities for growth in services with being the largest one in Europe. Secondly, as we do see the digital transformation picking up pace where our products have been well received in the market. We see our product pace increasing. And where actually product sales could be a good sort of step towards growing services sales as well as we get a strong relationship and foothold with the customer utilizing our digital products.

Next question was actually a few questions. First was on the software service solution on the typical customer to solution and what the pipeline is looking like. And if any customers have signed up for a bundle upgrade with hardware connectivity in the platform?

Okay. So if we start sort of with Software-as-a-Service, and this is relating to another question that we received as well by the Software-as-a-Service customers. A typical customer for us for Software-as-a-Service customer, we say it's a customer in one of the markets where we're not actively engaged ourselves with service delivery. And while it was soft in Germany, France, other markets are highly relevant examples. So the typical customer for us is another service delivery entity like us, for example, in Sweden, maybe not with their own hardware, of course, not with our own hardware platform by utilizing others' hardware connectivity and software to deliver technology-enabled care services.

So this is a typical customer for us. And I would say, in terms of number of connections, it depends on the market, a lot of markets are still fragmented. We were looking at customers, both with sort of low thousands and number of connections, but we're also looking at customers with 20,000, 25,000, 30,000 connections in different markets. And when it comes to bundles, of course, certain customers that we are engaging with are either already customers for our products and or connectivity today or are interested and potential customers for a broader offering as well where we see both products and/or the Software-as-a-Service platform, being a good spearhead into creating a good platform for broader engagement with the customer.

Just looking at the questions. And on the question, I think relation common system for the service delivery coming in the U.K., you see an efficiency gains and quality improvements already? As I said, we have now implemented one common service delivery or ARC platform throughout the U.K., but are utilizing the same platform throughout the entire U.K. It's the same platform as we're using in the majority of the Nordics as well.

This means that we have greater opportunities to be -- to work with service delivery in an efficient way and with improved quality. This is already implemented in the U.K. And yes, we are starting to see improvements during the latter part of the quarter as a result of this, and we are confident. We continue to see further improvements, both in quality and efficiency during the third quarter.

Product in U.K. continues to show strength also a talk among customers. I think I said, we do see that the digital shift is picking up pace. Customers are starting to realize that sort of going digital is inevitable. It's also been published tests during the quarter where to reach sort of a test entity have tested different solutions when it comes to analogue to digital, digital to analogue so trying to sort of maintain existing hardware but converting signals and recommend that this is not the solution to go for, the recommendation is that you need to go fully digital. And we believe that will further sort of trade drive for the digital transformation now in the U.K. that we believe will continue to pick up pace until the shutdown in their own network in 2025. Because if you think about this 1.8 million, 1.9 million connections in the U.K., and that's a quite a daunting task to replace all of that hardware units during this period of time.

On the gross margin, the challenge in the supply chain and higher freight cost and on costs, do you see any light in the tunnel? We have sort of, I would say, cost-wise, we don't see any real improvements. If anything, during the first half of the year, there has been some continued price increases when it comes to components. I think when it comes to availability, the situation has stabilized a bit. So availability is still -- it's still challenging, but it's more stable and maybe slightly improving. I do think it will continue to improve, especially from an availability perspective as we move further into them this year and beginning of next year, especially if we look at the economic climate, and I think we all see electronic goods -- sort of sales of electronic goods is starting to decline, which will lead to improved availability of components in the end.

Final question here from Redeye. It seems like some parts of Europe are experiencing another wave of COVID. Are you noticing anything in your centers. -- is specifically increasing anywhere or are you working to limit the impact? So as you say, yes, COVID is unfortunately starting to rise again in many countries, especially we've seen it in the southern part of Europe, where we don't have any service delivery to date.

We do have experienced some cases of COVID in our other countries like Sweden and the U.K. So far, knock on wood, limited -- sort of few cases or a limited view. But it's, of course, something that we're monitoring closely. And COVID has taught us to manage sort of service delivery also from a distance. And we hope that we can continue to do that in a good way and hopefully maintain low levels of sick leave, obviously, we start to see increasing levels of COVID.

And I see that was -- I think that was all the questions that we received in the digital chat room as well. So thank you very much for good and insightful questions. Thank you very much for listening in.

As I mentioned, it's positive that we continue to see good growth in all main regions in both products and services. Now we focus on maintaining a good growth for the company, continue to grow our business, continue to take market share while we ensure we get back to profitability. So that would be our continued focus during the third quarter of this year.

With that said, I wish you a great summer and looking forward to speak to you again. Thank you and bye.