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Earnings Call Analysis
Summary
Q3-2023
In Q3 2023, the company announced a strong profitable growth for the fourth consecutive quarter, with net sales up 23.5% to SEK 217.3 million from SEK 175 million in Q3 of the previous year. The gross margin improved significantly to 43.5% from 34.8%. Operating profit saw a remarkable turnaround to SEK 20.7 million compared to a loss of SEK 18.2 million last year. However, cash and cash equivalents decreased to SEK 36.1 million from SEK 43.7 million, and net debt increased to SEK 227.9 million from SEK 204.8 million. Notwithstanding these solid results, the company expressed disappointment over its cash flow performance, emphasizing efforts to reverse this trend.
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Welcome to this live 3Q presentation with Careium, a company that brings technology-enabled care. And I am honored to welcome Christian Walen, CEO and President. Welcome, Christian. Hello, and welcome, Christian. Can you hear me?
I can hear you perfectly well. Can you hear me?
Yes, please. Happy to have you on the show. Careium will start off with a presentation today followed by a Q&A where you, who view this, can ask your questions in the live chat.
But first, Christian, how would you describe the third quarter 2023 as a whole?
Well, I think it's apparent for everyone looking at it to see that it is a solid quarter. It is a quarter that serves to truly underline our recovery as it's the fourth consecutive quarter showing strong growth and also good profitability. So I'm very happy. Mathias, incredibly happy, and all our staff are tremendously excited about finally getting to show the markets what we are all about.
Thank you, and I will be back after the presentation for the Q&A. But now, please -- is your. Go ahead.
All right. So I'm actually not alone here. I also have my colleague and CFO, Mathias Carlsson, here with me. And we are really happy to detail to you the outcomes of our third quarter 2023 report. So you can bring up the slides maybe. There we go. Right.
So for us, as I mentioned, the third quarter of '23, really is our fourth quarter, showing a solid performance and underlining the recovery of our business. For those that have been following us, in 2022, you realized that we were in a very tough situation, and we are now firmly moving ahead towards creating our own future.
I am particularly pleased to see our U.K. operation starting to win contracts in a different way than it has been doing over the last couple of months, so very positive. And building on that, I'm also very happy to include in the highlights that following the activities that we have taken high [ above ] of the various companies and really trying to integrate our U.K. entities under one umbrella, we are now building on that to create better systems, processes and efficiencies going forward. And we expect the majority of the groundwork to be ready for the first quarter of '24. So really excited about that.
So with those highlights out of the way, maybe we can move to the next slide and go over sales and gross margin for the quarter. So in Q3, we increased our organic sales with 23.5% compared to the third quarter of '22. So adjusted for currency effects and so on, this is a growth of 18.4%. And the total sales we delivered were SEK 217.3 million. And if we compare that, it is a clear increase on last year's same period outcomes of SEK 175.9 million.
So service sales comprised SEK 159.3 million, up from SEK 134.4 million last year, which is an increase by 18.7%. For product sales, we delivered SEK 58 million in sales compared to SEK 41.7 million in 2022. This corresponds to an increase of 39.2%.
Our gross margin in the third quarter for '23 was at 43.5%. So compared to the same period last year, this was then at 34.8%. So the improvement is very much driven by our cost downs, our efficiencies in alarm operating -- some temporary price increases and some prolonged contract as we have negotiated and also, to some extent, the favorable exchange rates.
And with that, we head into our markets, starting out with our business in the Nordics. So our business in the Nordics saw sales rise 10.5% compared to the same period in last year, that is '22 with services growing 8.4% in the same period. The year-on-year comparison on gross margin was also positive and the total sales attained were at SEK 97.2 million, up from SEK 88 million during the same period last year. This is very much reflective of the solid, stable and positive Nordic market there.
So if we move to the U.K., we saw strong overall sales development attaining SEK 85.7 million in sales, contrasted with SEK 64.5 million in the same period in 2022. This is an increase of 32.8%. The service sales increased by 33.3 percentages compared to the same period last year. The product sales were up 32.1%, particularly pleasing, as I mentioned also that we are now back to sort of winning contracts, getting on frameworks in a much better way in the U.K.
So the gross margin in the quarter for the U.K. was at 43.8%, up from 25.3% in the same period last year. And this is mainly driven by the efficiencies put in place, some contract prolongations with renegotiated prices and also a favorable exchange rate between the pound and the dollar, which impacts the costs for the products and so on.
And with that, we move on to other parts of Europe, and we end up in the Netherlands. Netherlands gross sales up 23.7% higher than the same period in last year, delivering SEK 18.7 million in sales compared to SEK 14.8 million in Q3 '22. The growth was also reinforced by a stronger customer mix. And what that means is that we get more corporate and private pay clients coming into our services and of course, also some effects of the euro in relation to the SEK.
Gross margin was a little bit impacted by the need for temporary staff in our business and the fact that the Netherlands is, out of all the countries in Europe, one that have been the hardest hit by inflation and its impact on salary. So it is due to that.
In our other markets, which predominantly are comprised of France and Germany. Germany, in particular, did really well. We've increased our sales for the third quarter of '23 towards the same period last year with 86.6%. And this is, of course, reflective of our efforts to really do our best deals in some of these really big markets out in the European region. Of course, again, a little bit of an effect of the euro in relation to the dollar, which has an impact on our product sales.
And with that, we can move to the next slide for profitability. So our EBITDA for the quarter amounted to SEK 44.1 million in contrast with last year's same period, where it was at SEK 0.8 million. The EBITDA in the third quarter for '23 was not impacted by any adjustment or restructuring costs or anything of that sort.
We delivered an EBIT level of SEK 20.7 million for the third quarter in '23, which if we contrast that with the same period in last year was at minus SEK 18.2 million. Again, our EBIT, not impacted by any adjustment or extraordinary items. So the reason for our much improved profitability is, of course, solid, strong sales growth and also actions taken for cost reduction and efficiency.
With that, we can turn to the next slide on cash flow and cash. So the cash flow from current activities in the third quarter '23 amounted to SEK 1.6 million compared to minus SEK 20.8 million in the same period in '22. The free cash flows for the third quarter in '23 amounted to minus SEK 9.8 million, which is a major improvement versus same period in last year, where we saw a negative free cash flow of minus SEK 34.3 million. But in spite of this, we are not very happy about it, and I'm sure we'll talk a little bit about it later, what we are doing to rectify it.
Our cash totaled SEK 36.1 million at the end of the third quarter in '23 compared to SEK 43.7 million in the same period last year. Our bank overdraft facility showed available cash of SEK 37.3 million compared to SEK 50 million last year, same period.
Our net debt amounted to SEK 227.9 million at the end of the third quarter compared to a net debt of SEK 204.8 million in the same period last year. At the end of the quarter, Careium was in full compliance with all the covenants for the bank facility agreement.
So with that, let's turn to the conclusions and summarization of our Q3 '23 report. So the highlights for us are strong profitable growth continuing now for the fourth quarter in a row. Really happy about truly being back on track. We delivered a very solid EBIT level through a combination of the efficiency, the sales mix and some renegotiation of prices.
Personally, for those who have been following the company, I was part of the Board before joining as CEO. The U.K. has been a major challenge for an extended period of time. And I'm very pleased to see that we are now having the right relevance for our customers and going back to winning deals also and growing our businesses. So really happy about that.
In regards to challenges, we are just about or have actually launched our Abby, our new mobile social alarm, i.e., business technology that you can take with you with the GPS positioning and lots of features that are really helpful to our users and our customers. Sadly, it was a little bit delayed, not massively, but around 1 to 3 weeks, which is a real shame since we have more and more customers queuing up for this really sort of next-generation technology.
So as mentioned, cash flow, really disappointing in the quarter in spite of us getting better at our inventory management and so on. We moved to the priorities then. Clearly, we are now deep in sorting the U.K. out. It will still take a little bit of time, but we have a really strong plan. We know what to do, and we know when we should expect to have it in place and to rework the business to make it truly fit for purpose and really competitive. So we need a couple of more months to do that, but come the start of the next financial year, we should definitely be in a very good space.
As mentioned then, of course, throughout the report also, our cash flow is not where we are happy to see it. We are putting every single tool and effort that we have available to us to make sure that we do our absolute best to reverse this development.
Yes, when we look at last year, in comparison, we are doing a much better job, but we are still not at the level where we, ourselves, feel happy about the trade outcomes.
And with that, I conclude the report for the third quarter of 2023 and over to the studio.
Thank you, Christian, and it's time for the Q&A. And I'll start off with some numbers, the result. Your net sales amounted to SEK 217.3 million compared to SEK 175 million last year, third quarter, an increase of 23.5%. What is the main driver for this positive change?
Well, I mean, the main driver is, of course, that we are more and more relevant to our customers. We are a very innovative company. We are very well regarded out in our markets. And we are making a lot of effort into driving our commercial work in a positive direction. So that is the main driver, we are generating organic sales.
On top of that, we also have some price increases that are positive for us. We have some favorable FX effect, but I'd argue that the main driver is the hard work of our colleagues out there and the great relationship we have with our customers.
And your gross margin amounted to 43.5% compared to last year's third quarter, 34.8%. Besides currency effects, what -- how did you manage to end up here?
Well, it's actually, again, the outcome of really hard work done by a lot of people over an extended period of time. And it's mainly about increasing the efficiency, some aspects of our operations. We have mobile response team in some markets. We have alarm-receiving centers in other markets, and these are very sort of operations-heavy kind of activities where we have really doubled down on being as efficient as we can. So that is one of the main drivers.
On top of that, we also have the fact that the cost for components has come down, which impacts the price for our products and so on. So that is also something that contributes.
And sports question, maybe you might say, your operating profit was SEK 20.7 million compared to last year's third quarter, minus SEK 18.2 million. What are your feelings delivering this number?
Well, I think I can speak for the entirety of our business. We are, of course, really, really happy to deliver really solid profitability. However, I think what it also means for us is that with a really challenging year sort of behind us, this is, in a way, also when the real challenge starts because now we are going into being the company that we were meant to be. And that means that for next year, we will be -- next quarter, we will be competing with ourselves. And that, of course, will take an even greater effort.
So if anything, I think we're really happy that we're proving to everyone that in the process of improving the lives of millions across Europe, we're also a really well-performing business. But now the real challenge begins to sustain and retain and grow even further from this really strong market.
How confident were you that you would deliver a profit this quarter?
I was very confident. I think if you look back towards our fourth quarter for '22, you can clearly see that we are driving ourselves in a completely different way. We are much more efficiently focused. We are much better geared towards working with our customers and putting them at the center in everything we do. And that is what reflects in providing really good outcomes.
So I was quite confident and then, of course, the number is, in comparison, really, really strong, which is, of course, fun. But I [ also ] do things that you asked for the sports question. And I would also say that, well, as athletes, we also look forward to the real challenges. So the junior leagues, this is not going to be playing, but rather to move up to where we truly [indiscernible].
And we also have an equity analyst in this digital studio, Oscar Ronnkvist at ABG Sundal Collier.
So just the first one, rather a technical one, but just on the significant working capital tie-up in Q3. Do you expect that to revert in Q4? Or we expect that a bit later?
Do you want to take it, Mathias?
Yes. We expect to have a much better cash flow in Q4. Of course, working capital often swings a bit between the quarters and that we had a lot of payments in Q3 on supplier invoices and also the holiday period. There was some means that we have double salary pace, you could say, in Q3 because you have holiday staff also. So it should mean that we will focus a lot of ending the year in a good way from a cash flow perspective.
And it is one of our biggest priorities. I mean, if we are very transparent, which I truly believe we should be, we are delivering really strong on sales. We're delivering really strong on profitability, but the cash flow is a disappointment. And of course, that spurs us to do everything we can to make sure that we reverse the situation.
To Mathias' point, when you drive a lot of growth and, in particular, in a lot of growth also in hardware, it is unavoidable that you get to situations where you have a bit of an inventory tie-up, right, because otherwise, you can fund that growth in terms of really serving customers and so on.
So some level of swings will always be a factor of having this level of growth in this type of industry but it's on us to ensure that those swings are as controlled as possible.
Understood. Just next one on efficiency. So I think you've obviously improved the OpEx levels steeply. And just to get a sense of the run rate again, could we expect some more efficiencies in the coming few quarters? Or do you think you have a solid run rate at the moment that -- and I mean your earnings growth will be driven by higher growth on the top line instead?
Well, I think it's important also that when you move in a -- with a very strong momentum and you grow your business, and you have the history that we have had, it is also important to look to the long term and make the investments necessary to ensure that you come out even stronger, not just for the next quarter, but for the next year and the year following that and so on.
So I would be hesitant to give you any real answer to the question, but rather it's about the balancing act of what sets us up for being even stronger 2 years out. I mean, we have all of Europe to conquer. So in that regard, I'd say, well, we're in a good spot, but we think we can make it even better. But we also need to take some investments to make that happen.
I see. All right. Next one, just on leverage coming down sharply, given the EBITDA growth and also improved cash flow the last few quarters. So just wanted to get a sense of potential M&A agenda. You have been acquiring in a high pace before. So just if you could elaborate a little bit -- see that now.
Yes. I mean, we have a very solid strategy in place or more fully behind it. And -- I mean, it makes perfect sense to look to M&A in the upcoming years. The thesis of this market being very fragmented and so on, that still holds very true.
But as I've said previously and also in other forums and so on -- I mean, for us, we need to be a very solid platform to integrate our acquisitions in two. And until we feel really comfortable with the fact that we can make those acquisitions a lot more value adding and high-performing as part of our family, we will be very, very cautious to do so. So I agree. I mean, our sort of ratio in terms of the net debt to EBITDA, I would say that we're almost underleveraged. So yes, I agree.
Understood. Just a final question. Just if you could say something on approximately how big of a share of the contracts are indexed on inflation? So I just wanted also to get a sense of the 18% organic growth and how much would be driven by price and how much would be driven by volumes?
Mathias?
Yes. You can say that when it comes to service contracts, most service contracts have some sort of an index closing so that we can make price adjustments, but it is not always -- it was for some it automatically. But for others, it requires -- locations.
Yes. And it's market by market in the sense that the more business -- republic you have in the Nordics, for example, we're really strongly business republic. Those are more or less standardized increased closes to Mathias' point, you just index up for some grid index, and that is sort of part of the contract. Whereas in other markets, there might be clauses related to when you can renegotiate and so on, when it's sort of up to you and the customer to have that conversation and it's not necessarily as clear cut. So I'd argue a mix that will probably be the most honest we plan.
I'll move on with some more questions. During the quarter, you launched a new governance model for your about 550 employees. Could you put some color to that, please?
So yes, certainly. What we have done is to review, of course, from a strategic point of view, where do we want to go. How do we see ourselves developing over the upcoming years and so on. But also to consider what is actually the roles, mandates and responsibilities that we need as a business to be able to drive our markets as efficiently as possible.
So some of these changes are, for example, that we see, that we need much, much stronger interface between our R&D and our supply chain teams. So we're making changes there. We're dedicating a lot more focus on to our product sales and working with production partners to be more efficient. And we're also looking at how we can steer our commercial activities across the business and across all markets in an even better way since we see that we have a really high level of commercial excellence in some markets and maybe less so in others, and we want to ensure that we are operating at a very high and ambitious level.
So role changes, mandate changes, also, of course, some hiring for the competencies that we need and so on. So hopefully, there will be some interesting announcements on people and road role shifts here in the upcoming which we've had a quiet period now, so we haven't been able to communicate it.
Okay. And when it comes to innovation, how do you work with that? And how big is your R&D department?
Well, that's a very interesting question. I mean, we are, in many ways, a technology company. We're a technology company borne out of the sort of a Nordic view on technology, which makes our sort of quality levels and innovation levels sort of almost inherently very high.
And while you might look at what we do in software and hardware here in the Nordics, say, well, it's interesting. It seems to do the job really well. There are some features here that are really strong. If you take that same level of innovation to a country like Spain or France, it is top of the line.
So in that regard, our way of working is that we have a very strong R&D organization that is covering three different segments of how to drive our innovation. One relates to the embedded software, the phoneware and how we can work with over-the-air updates and so on for the technology that is out in the users' homes and with our customers. One is directly related to the hardware, the design, the engineering and so on of the physical products. And one group being within R&D is solely developed to platforms and digital in terms of how the services come together, both from [ front ends ] and back ends.
So that is how we are set up. I think we have the right type of staffing. We're thinking in the right way. And I think the proof is very much also in the sales that we are -- or very relevant to our customers.
Working with technology enabled care, how are you affected by regulations? Are they the same throughout the EU? Or are they different in various countries?
Again, very good question and an interesting one. So what is very strange is that from a regulatory standpoint, care and care activities sits in this sort of strange gray zone between health care and other social services. So it's not as heavily regulated as health care is but it's not without its guidelines and recommendations and so on.
So if you take a big market like the U.K., for example, there, you will have an industry body, which is the sort of really strong governing entity but it's not really regulatory. It's more of the sort of industry regulating itself. So it differs quite a lot. But in general, I'd argue that the level of regulation is quite a bit lower than what you'd expect but that goes for the care sector in many, many different markets.
However, the way technology enables care to use and implemented, even if you have the same technology and so on, that can be completely different. Spain is all about outreach and being proactive towards the end users, the seniors living in their homes whereas a market like the Norwegian, for example, is highly digitalized. It's focusing a lot on interactions of data flow and also features a lot of reactive activity almost to the level of running an [ ambulatory ] service, almost. So it is very different, but it's quite a low regulation level.
Okay. And to make a last question, what are you focusing on in this incoming quarter?
Well, as stated, I think our work in relation to truly getting the U.K. fit for purpose, that is a key activity for us. The second component is obviously the work related to the cash flow that goes for spanning the full spectrum of system implementation, process changes and roles and mandate changes and so on. So those will be the two absolute near-term priorities.
Longer term, of course, our retained innovation, ensuring that we are delivering on what our customers asks us to do and to do so in an efficient way that is and will always be one of our key priorities.
Christian and Mathias, wish you the best going forward, and thank you so much for taking your time.
Thank you. And thanks to everyone joining.