Careium AB (publ)

STO:CARE

Earnings Call Transcript 2022-Q3

[Carl-Johan Zetterberg Boudrie, executive]

Thank you very much, and good morning, everyone, and welcome. Today, we are here to present Careium's Third Quarter results for 2022. And after the presentation, we will give you an opportunity for Q&A session. Together with me here today, I have our CFO, Mathias Carlsson. We can move into next slide, please, and quarterly highlights.

The positive sales development continued for Careium in the third quarter, achieving the second highest sales in a single quarter for Careium and strong organic growth. In the quarter, we have continued to take market share in the Nordic region after several successful contract wins and implementations in Sweden both new and existing customers, reaching all-time high in number of connections in the Nordic region. The demand for digital solutions in the United Kingdom continued in the third quarter with strong product sales and evidence of the digital transformation pace has increased.

During the quarter, we also continued to strengthen our offering launching the i-care plus app, which connects users, care providers and relatives. The app provides peace of mind with improved communication within the care chain, new functionality as well as important time and cost savings. The challenges in the U.K. continued in the third quarter and continue to impact the group's profitability negatively.

Despite the efforts during the year, the transformation is taking more time than anticipated. Many actions are now done during the year, such as we moved our operations to a single location in Blackburn. We've implemented a unified platform for alarm handling. We have started to terminate unprofitable customer contracts, and we have significantly strengthened the leadership team in the U.K. And during the end of the quarter, we started to see operating costs in the U.K. that they started to decrease.

Of course, the focus going forward will be to restore profitability for the group to ongoing transformation in United Kingdom as well as initiatives for improved profitability throughout the group. Let's move into next slide and give you some more flavor on sales and gross margin in the third quarter. Net sales in the quarter equaled close to SEK 176 million, which is an increase of 25.5% compared to the same period last year. For the first 9 months, sales equal close to SEK 530 million, which is 24.4% above the same period of 2021. Positive is that -- the sales growth in the quarter continued across all regions and in both products and services.

What's also positive from a sales perspective is good and strong organic growth in the quarter of close to 90%. Increasing organic growth is something that we worked within the last couple of quarters and especially during 2021 to further drive sales and further drive especially organic growth. And it's positive to see that that's now showing results. Also currency adjusted we grew with 15% organically and especially the success in the Nordics, driven by Sweden is the main reason for the good and strong organic growth in the quarter.

Sales of services increased by 20.4% to SEK 134.3 million, with a number of new contracts implemented in especially Sweden and also the acquisition of Innocom in the third quarter of last year. Sales of products was SEK 41.7 million, which is an improvement of 45.2% and in line with the second quarter of this year. The growth -- the strong growth in product sales compared to last year is driven by good growth in the United Kingdom, as we start to see increasing sales of digitally -- of digital equipment as a digital shift is increasing its pace.

The gross margin in the third quarter amounted to 34.8%, which is lower than the previous quarter of this year and also lower than the same period last year. Above all, high costs in U.K. operations, to ensure quality in service delivery continued to impact the gross margin negatively in the third quarter. Also high shipping costs and component costs as well as the weakening Swedish krona continue to have a negative impact on the gross margin also in the third quarter.

Number of connections in the group, continued to increase and increased with 4.5% to 407,400, which is an increase well over the second quarter where the number was 401,000.

Next slide, I'll show you some highlights for our different regions, starting with Nordic and United Kingdom. In Nordic, we saw strong sales increase in the quarter 36.4%, reaching new all-time high in sales in the region of SEK 88 million, driven by implementations of new contracts in Sweden. But also Norway increased sales in the quarter compared to the same period last year with higher activity in existing service contracts. Also compared to previous quarters of 2021, we saw a good sales increase in the region during the third quarter. Number of connections equaled 134,600 with good growth of 10.4% compared to the same period last year and up from 130,500 in the second quarter of this year.

In United Kingdom, we managed to grow our revenue with 3% despite the challenges that I mentioned previously and sales equals SEK 64.5 million compared to the same period last year, but it is a slight decline compared to previous quarters this year, and predominantly a consequence of our challenges in service delivery. But the negative effect we've seen in service sales have been more than compensated with strong product sales in the quarter with increased deliveries of digital equipment. Product sales in the region increased with close to 60% compared to the same period last year.

Connections in the United Kingdom region include 243,900, which is an increase of 1.3% compared to the same quarter last year. Next slide, and we continue with highlights for Central Europe and other markets. Sales in Central Europe increased with close to 75% compared to the same quarter last year and equals SEK 22.3 million. The sales increase is predominantly a result of the acquisition of Innocom that was included in the group from September 1, 2021. And sales was on a similar level as previous quarters of this year. The number of connections at the end of the period was 28,900, which is an increase from the second quarter of this year when other connections equaled 28,600.

In other markets, sales increased with 16.9% to SEK 1.2 million, where France is our main market in other markets where we predominantly sell and deliver mobile telecare solutions to the French market. Next slide, please. And a little bit about the profitability in the third quarter of 2022. The profitability in the quarter was, of course, significantly impacted by the restructuring that 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, which impacted the gross margin negatively. The adjusted EBITDA amounted to SEK 0.8 million in the quarter and adjusted EBIT amounted to SEK 18.2 million compared to minus SEK 1.1 million in the same period last year.

And the operating profit of minus SEK 18.2 million was negatively affected by nonrecurring items relating to the transformation in the U.K. of SEK 2.2 million. Take next slide. And of course, given sort of the profitability in the quarter and also what we see the challenges that we've seen in previous quarters in predominantly United Kingdom, we have initiated a significant [ construction ] program of the United Kingdom operations. To ensure that we restore profitability, both in United Kingdom and sort of service delivery excellence in United Kingdom but also restoring profitability from a group perspective.

As I did say, the challenges in the U.K. have continued to be significant in the quarter, which to some extent, is a disappointment as the transformation is taking a bit more time than anticipated. Having that said, many activities have been completed during the quarter and in the previous quarters of this year, such as, as I mentioned, we moved to a single location in the north of England. We've implemented a unified platform for [ call ] handling and alarm handling. We have started to terminate unprofitable customer contracts. We initiated price increases where possible in both private pay and in other areas. And we significantly strengthened the leadership team in United Kingdom. All of these changes and improvements will drive further operational efficiencies going forward. And also during the end of the quarter, we did see the operating cost of the U.K. business starting to decrease.

In addition to the transformation program in the United Kingdom, initiatives to strengthen the profitability have been identified also in the rest of the group. We'll be taking steps in the third quarter and will continue to take further steps in the fourth quarter to ensure that our measures will improve both gross margin as well as reduced operating costs with the ambition or the target that we expect to increase operating profit by SEK 68 million on an annual basis with the total transformation costs of around SEK 30 million.

Next slide, please. And cash flow in the quarter. Cash flow from current activities during the third quarter was minus SEK 20.8 million, which is an improvement from the same period last year, driven by changes in working capital. Free cash flow amounted to minus SEK 34.2 million and net debt amounted to SEK 204.8 million at the end of the third quarter. Given the challenges that we've seen in profitability as a result of the restructuring efforts we do in the U.K. and that we are committed to succeed with -- and where we will see some clear improvements going forward. But this resulted in at the end of the third quarter, we broke one of the covenants in the finance agreement that we have with the bank. The bank have issued a waiver for this covenant. And the company, as a consequence, continues to have access to bank financing and have a clear trajectory of restoring profitability and getting back on track also when it comes to the financing agreement.

Next slide and some concluding remarks. From a positive perspective, sales was good also in the third quarter. Good sales with strong organic growth and something as I mentioned, we worked on significantly to ensure that we drive further growth in Careium, and we have seen a step change in sales and in growth -- organic growth during the year, and the third quarter was no different. We have continued to win and implement new contracts in Sweden, achieving high sales growth in the nordic regions for strengthening our position to reach a new all-time high levels, both in number of [ engines ] served but also in sales figures in Nordic regions, and we continue to see and show strong product sales in the United Kingdom which is testament that we do have a good demand for our digital offering in the region.

Challenges in the quarter is, of course the challenges in the United Kingdom that continued in the quarter and still burdens the group's profitability significantly. High cost in U.K. operations to ensure quality in service delivery and continued to impact gross margin negatively and also, of course, impacting the overall profitability negatively. While we did see a clear negative operating profit in the quarter and then so going forward, of course, the focus is to ensure that we execute on the ongoing initiatives to restore and return to profitability and finalize transformation program in the U.K. to improve both efficiency but also quality and market position in the United Kingdom. This in combination that we will continue to carry out our strategy and the purpose and ambition we have in Careium to become the market leader in technology-enabled care in Europe.

As a final word, I would also like to say that this is my final quarterly report for Careium as the CEO. I will take the opportunity to thank our competent and dedicated employees of Careium, but also, of course, as well to thank our partners, customers, shareholders, for giving me the opportunity and pleasure to work together. Thank you very much, and we now move into a Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Oscar Ronnkvist of ABG.

[Oscar Ronnkvist, analyst]

So just starting with the terminated unprofitable contracts. So how do you think that will hit your sales growth looking forward?

[Carl-Johan Zetterberg Boudrie, executive]

I think it could have some negative impact on the sales levels. Yes, I wouldn't say it will be of course, depends on [indiscernible] and what we achieve in discussions with the customer, our first aim and then sort of priority is [ together ] with the customers to discuss that we need to find a different price level where we can deliver good quality of service in the existing contracts. If that's not possible, then we will try to exit unprofitable contracts. But the priority is to make sure that we and the customer find a good solution where we can deliver good quality with sort of a reasonable price. Having that said, the purpose of exiting the contracts is, of course, to make sure that we restore profitability where getting back to profit is sort of a more important topic for us at the moment than just driving sales.

[Oscar Ronnkvist, analyst]

All right. Understood. Just next one. So in sort of across the regions, would you say that you are highly profitable in Nordics, for example, which looks quite successful? And can you elaborate a little bit on the sort of profitability levels in the successful markets? If it's solely driven by the U.K., the negative margins at the moment?

[Carl-Johan Zetterberg Boudrie, executive]

It's a relevant and interesting question. I think to some extent, we don't disclose some profitability per region. But I would say, and as we said, the challenges we have from a profitability perspective is to a very large extent a result of the challenges that we've seen and that we continue to have in the United Kingdom.

[Oscar Ronnkvist, analyst]

Okay. Got it. So what do you think -- so just isolating the sort of sales impact, not your restructuring business. So how do you look at the sort of the competitive landscape? Is it sort of generally a lower profitability because of the tougher competitive landscape in the U.K.? Or what do you think about sort of -- how do you expect the market to develop while -- or when you have your restructuring program successfully completed?

[Carl-Johan Zetterberg Boudrie, executive]

You mean from the market perspective or us in general?

[Oscar Ronnkvist, analyst]

Sort of in general, would you say that it's more -- or a tougher competitive landscape in the U.K. pressuring down margins? Or would you say it sort of equal to say Sweden, for example?

[Carl-Johan Zetterberg Boudrie, executive]

I would say it depends on the, I think, the scope of sort of different type of services or how the service structured [indiscernible] the U.K. where you go sort of from a very, very -- you can say, very small service to a very large service where in [indiscernible] more sort of towards somewhere in the middle. And in the U.K., I would say the services where you, for example, only had alarm handling and you maybe only have it for out of hours, that's quite a price pressured service.

Whereas the large services are not as price pressured. I think to some extent or not to some extent -- to a large extent from our perspective, what we need to do, one, as we said, we are taking -- we have taken measures and we continue to take measures to ensure that we improve our efficiency, making sure that we can turn sort of no profit or unprofitable contracts to become profitable. But then in combination, we need to make sure that we take the right contract with the right price, and we take the right dialogues with the prospective customers early on to ensure that they tender for the service in the right way with the right expectations on a reasonable service level.

And I think going forward from a market perspective, it's still, I would say, especially in the U.K., but in general, a challenging market, the last few years, especially COVID and I would say the after -- some shocks of COVID, where we -- to ensure our service delivery and quality and adhere to sort of the requirements we have. The challenges in blue light services and in general healthcare, especially in the U.K., they drive additional work for us but doesn't necessarily drive additional income as to the contracts are structured today. And that's something I think will change going forward, both sort of market dynamics as well as -- of course, blue light services and healthcare services will have to improve going forward.

[Oscar Ronnkvist, analyst]

Okay. Got it. So and then I have a question on sort of your last instructions to the organization. If you could distinguish between the 2, would you say that there's a focus on profitability rather than growth at the moment?

I know they are not...

[Carl-Johan Zetterberg Boudrie, executive]

Exactly. They're not usually exclusive. Of course, we would like to continue to grow our businesses but we need to grow it profitably. So it is making sure that we get back to profitability. In restoring profitability, it is important and sort of key that we make sure that we increase efficiency and we work smarter, but that we don't -- you could say hurt our competitiveness and our success in the market. So we need to make sure that we increase efficiency and effectiveness in the right places. Well, I should say, they are not usually exclusive but of course, we need to make sure that we drive profitable growth because growth is not sort of -- we can take the value of its own, it needs to be profitable growth.

[Oscar Ronnkvist, analyst]

Yes. Understood. And then just a question on the SEK 60 million to SEK 80 million on an annual basis increase in operating profit by the turn of the year 2022, 2023, as you write in the report. So how should we really interpret that? Is that sort of an isolated cost impact? Or is that sort of -- are you assuming sort of any profitable growth in 2023 by then or what's included?

[Carl-Johan Zetterberg Boudrie, executive]

So if you say the -- sort of the improvement of SEK 60 million to SEK 80 million, that's from our current level and improving to our overall profitability in that range from current levels. And then, of course, going forward, we will continue to drive, as we said before, profitable growth and making sure that we continuously see how we can work smarter to drive further profitability in the group.

[Oscar Ronnkvist, analyst]

Okay. So that's just isolated on the restructuring?

[Carl-Johan Zetterberg Boudrie, executive]

Yes.

[Oscar Ronnkvist, analyst]

Okay. Just a last question on the broken covenants. Is there anything more you can say about the covenants? I assume it was a net debt/EBITDA breach, but what are your sort of -- what's the bank telling you to do at the moment for them to continue waiving the covenants?

[Carl-Johan Zetterberg Boudrie, executive]

Can you guess, we got -- we did breach 1 of the covenants in the financing agreement. I would say we have a very sort of [ closing ] down the relationship with our bank. What we need to do from that perspective is sort of going hand-in-hand, what we need to do as a business, making sure that we get back to profitability and that we get back to profitability within a short period of time and we have a plan to do that. And we and the bank, we are in agreement with our plan, taking us back to where we need to be and continue to have a good relationship with the bank.

[Operator]

[Operator Instructions] And it seems we have no further questions. Please go ahead, speakers.

[Carl-Johan Zetterberg Boudrie, executive]

Okay. Thank you very much, everyone, for listening in. As said, in some ways, a good quarter, especially from a sales perspective, we continue to show good growth, including organic growth. But then, of course, an obvious challenge in making sure that we restore profitability by, first and foremost, executing and finalizing the transformation in the U.K. business. And then again, a big thank you to everyone, both colleagues and partners for my time in Careium and the trust that you've given me. So thank you very much, everyone.