Careium AB (publ)

STO:CARE

Earnings Call Transcript 2023-Q2

[Christian Walen, executive]

So a warm welcome to the Careium report for the second quarter of 2023. And I'm Christian Walen, CEO and President of Careium. And I'm here, as stated, together with my CFO and colleague, Mathias Carlsson.

And it's a truly exciting time for us at Careium with the strong performance, focus and disciplined action to deliver on our potential and innovative and interesting launches across both hardware and software in the upcoming quarter.

And with that, I'd like to move over to the quarterly report and its highlights. So first up, we have delivered a strong quarter across sales and EBIT without any adjustments, i.e., reflecting our underlying performance. I'm also very proud that the link between the actions we have taken and are continuously taking has a real impact on our outcomes. So we're also happy to see continued success in winning and implementing contracts in Sweden, coupled with the strong product sales, primarily in the U.K. And these are 2 very important indicators as it showcases the strength of our offering in 2 of the most demanding markets across Europe.

I'm also particularly proud of the fact that we have completed our hive-up in the U.K., effectively rolling 4 past acquisitions into one entity, Careium UK Ltd, which will serve as our platform for driving efficiencies, something that was not fully possible prior to this change. We're also really excited for our launch during the Q3 of The Abby, which is a mobile social alarm, which will be a key component for some of our markets and also strengthening our private pay division.

And with the highlights out of the way, let's move to sales and gross margin for the second quarter of 2023. So we saw organic growth compared to Q2 of 2022 of 22.6%, while there was some effect of currency, even if we adjust for it, we still attained a growth rate of 18.8%, which is a growth rate above industry standards and something that we're very proud of. In the quarter, we obtained service sales of SEK 158.9 million compared to SEK 132 million in the same period last year, which is an increase of 20.3%.

Product sales amounted to SEK 54.9 million, up from SEK 42.4 million last year in the same period, reflecting an increase of 29.5%. Our gross margin reached 42.2% in contrast with Q2 2022, where we attained 37.4%. This is driven by low cost for service delivery, following a lot of initiatives to drive efficiencies and also lower costs across our alarm receiving centers and more favorable exchange rates, primarily between the pound and the euro against the USD.

And moving on to our markets. And I'd like to remind you that since the start of the year, in the report, you will also find historic gross margin figures, which is a way for us to be more transparent towards the market and our investors. So first up, our business in the Nordics saw sales grow 18.6% compared to the second quarter of 2022. A standout was the service sales that increased 20.8%. Since the Nordics is a very mature market, we're very proud of this. Good performance in service delivery, and it's also reflected in our increased gross margin.

Moving over to the U.K. We saw strong overall sales development, in total amounting to 33.7% compared to Q2 in 2022. Product sales increased 52.9% versus Q2 2022, reflecting the high demand for our digital products. Personally, I think this is particularly impressive as we have also driven various change and development projects across the U.K. simultaneously while attaining this outcome. In the U.K., the gross margin for the quarter amounted to 38.6% compared to 30.5% in the second quarter of 2022.

And with that, we move towards Netherlands that we are disclosing as a separate entity since the start of the year. So in the Netherlands, we drove sales 15% higher than Q2 last year based on their work to attain a stronger customer mix and also adding new connections. Service sales increased due to this effort with more connections added, and the margin levels were driven both by specific customer projects as well as disciplined work with driving efficiency.

Other markets, which consists of primarily Germany and France, decreased 8.8% in terms of sales compared to the second quarter of 2022. And while there is greater volatility in these businesses, it is also in part reflecting our challenges to provide adequate stocks for Germany and France on specific products as demand and product requirements, to some extent, outweighs our ability to deliver at present. Gross margins were impacted slightly negatively due to the product.

Turning to profitability. For the quarter, EBITDA amounted to SEK 33 million compared to SEK 32.2 million in the same period last year. EBITDA in the second quarter of 2023 was not affected by any restructuring costs or any nonrecurring items. Whereas the same period last year, that is the second quarter of 2022, EBITDA was positively affected by SEK 20.4 million.

During the quarter, we delivered an EBIT of SEK 14.6 million for the quarter, which compared to the same period last year, where it amounted to SEK 13.5 million. However, as stated in [indiscernible] EBITDA -- EBIT in Q2 2023 was not affected by any restructuring costs or nonrecurring items. So last year, in the same period, the EBIT was positively affected by nonrecurring items of SEK 20.4 million. So there you have the apples-to-apples comparison. The improvement in profitability is driven by our focus on sales and also cost reduction and efficiency gains across our operation and also following some action programs that we completed last year and also developed, expanded upon and are continuously running for 2023.

We move to cash flow. Cash flow from current activities in the second quarter of 2023 amounted to SEK 18.5 million compared to SEK 10.3 million in the second quarter last year. Free cash flow for the period amounted to SEK 7.7 million in contrast with a negative free cash flow of minus SEK 3.9 million in the same period of 2023 -- 2022, sorry. Cash totaled SEK 53.7 million at the end of the second quarter in 2023 compared to SEK 83.9 million in the same period in 2022. The bank overdraft facility showed available cash of SEK 35.2 million compared to 0 in the same period last year.

Our net debt amounted to SEK 216.8 million at the end of the quarter compared to a net debt of SEK 223.7 at the end of the previous quarter, that is quarter 1 2023. Compared to last year's second quarter, net debt at that point in time was SEK 167.1 million. At the end of the quarter, we complied with the agreed bank covenant waiver that we have communicated as well as all original covenants in the bank facility agreement.

So to conclude the report of the second quarter and before opening up to take any questions, our highlights consisted of strong sales and good organic growth. While exchange rate did play a part in the sales, we still feel that underlying sales growth was very strong. Our efficiency measures are delivering, which is evident. And our cash flow of SEK 7.7 million was also positive in the current time. In spite of this strong result, we were also burdened by some increased OpEx costs for a lot of the changes made, such as the legal fees for the hive-up in the U.K. And towards the end of the quarter, there is a seasonality effect with people going on vacations and customers not being as available. So we did a lot of work to try and rectify that as much as possible.

In addition, during the quarter, the EU also saw a number of incidents where failing infrastructure caused outages that hit our customers. And I'd argue that this is a clear signal that the EU needs to speed up its transition to digital infrastructure as it is putting people at risk. We look ahead in our priorities going forward. We now have a very strong plan in place for our U.K. business, which is enabled by our hive-up. We will also increase our focus on inventory management, associated processes, systems and so on to impact and optimize cash flow and be even faster in servicing our customers.

We are also very proud that we are in late stages of launching our new product, Abby, during the third quarter, which is a mobile social alarm that is well suited to our private pay business, connects really well with the demands in many EU markets, and it particularly caters to seniors who are out and about and able to take all their security with them. In addition, we also have expanded data capabilities, which will make for more meaningful digital service.

And with that, we conclude the presentation, and we'll now be very happy to take your questions.

[Operator]

[Operator Instructions] The next question comes from Oscar Ronnkvist from ABG.

[Oscar Ronnkvist, analyst]

I'll start with the top line one. So the organic growth saw quite a sharp pickup in the quarter. So I was just wondering, are you seeing any nonrecurring effects supporting that top line figure? Or should we see it as underlying demand has accelerated? And also, did you experience any bottlenecks in delivering sales in line with demand over the last few quarters? So just trying to get a sense of the run rate top line here.

[Christian Walen, executive]

So thank you, Oscar. Very good question. We're pleased to report that in regard to the top line, there were no nonrecurring effects impacting it. Rather, it was indicative of not just the demand, but also our ability to capture it and drive sales through our activity.

In regard to the second part of your question regarding challenges to deliver, we, compared to many other entrants in the industry, do not see that as much of a problem. We've been quite diligent and working really hard to ensure that we can source components and so on to actually bring our products and services to our customers. When I commented on the Germany and France situation, it's not necessarily just stock levels, it's also some market-based requirements on the products that we need to be faster to deliver on. So I don't see any challenges in regard to that, rather that we are perhaps a little bit behind our schedule. But we're quite proud to see our sales being sort of indicative of real demand and real ability to capture that demand.

[Oscar Ronnkvist, analyst]

Perfect. Just a follow-up on top line. So do you see any price increases on current connections that you could implement in the future? Or should we see it as only the new contracts that you maybe can raise prices on?

[Christian Walen, executive]

Well, since we have both activity in B2B and in B2-government or business to public as well as business to consumer, it changes a bit market by market. I'd argue we have -- in some instances, contractual opportunities for price increases. Of course, every new contract represents that ability, but there is really quite a large regulation on price increase opportunity based on how our contracts are structured. So, so far, that has been doing quite well, and we don't see anything out of the ordinary in terms of either having greater opportunities nor being particularly challenged in relation to price increases.

[Oscar Ronnkvist, analyst]

So next one, just on the gross margin. It was up 3 percentage points sequentially. So I was wondering if it's mainly driven by the fixed contracts with low profitability or even the loss-making ones, or if we should see it as internal efficiencies explaining the majority of the gross margin improvement? And just finally, if you could quantify the FX support, please?

[Christian Walen, executive]

So to answer your question, it's a bit of both. We've been really diligent in reviewing and scrutinizing our operations to be as efficient as possible. So that has clearly had an impact. We have also, particularly in the U.K., we have done our best to transition out of the less profitable contract, which also has a positive effect. And in regards to the FX effect, Mathias, is there anything really to comment on that, that we haven't disclosed?

[Mathias Carlsson, executive]

Well, what we can say, we don't have an exact figure because, of course, there are many components when it comes to exchange rates effects on things. But what we can see is that the relation between the British pound and the U.S. dollar, I think that the British pound is about 10% stronger versus the U.S. dollar in -- now in Q2 '23 compared to what it was in '22. On the other hand, of course, the SEK is weak, so it goes both ways. But the -- overall, we have had a positive impact on having a weaker dollar towards euro and pound, especially pounds.

[Oscar Ronnkvist, analyst]

Just a final one on CapEx levels. I think you were at around SEK 11 million this quarter and SEK 10 million the last quarter. So it's a fairly big step down from 2022 levels, what I can see. So can you say anything about the CapEx run rate? Is this sort of a normalized level? Or should we see it pick up closer to 2022 levels?

[Mathias Carlsson, executive]

I would say that -- you can say that the CapEx consists of 2 main components. One is, of course, our R&D CapEx. And that is a bit lower this year than last year due to the -- that we had a cost saving program last quarter, but it's not major differences. When it comes to the other component, it is the amount of rental equipment that we have, and that depends a bit on whether the customers choose to buy or if they want them on rental. And this year, it has been less favorable on asking for rental contracts. So that can go a bit up and down and swing a bit between the years. So more difficult to forecast that also.

[Christian Walen, executive]

So in summarizing Mathias' comments, you should not expect any major changes but rather a normal variation. Should there be any major changes to CapEx, that would be driven by us taking on other kinds of developmental projects and so on, and thus, by our own volition and decision. These smaller variations are more sort of market driven to some extent in regards to the rental contracts and so on.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Christian Walen, executive]

Well, with no further questions, we would just like to thank all of those who have listened in to our presentation. And we genuinely hope that you have gotten good information, good understanding on where we're heading. And at Careium, we are really looking forward to keep on delivering in the same momentum. So thank you all, and have a very good day.