Doro AB

STO:DORO

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Doro Interim Report January-March 2019 Call. Today, I'm pleased to present Robert Puskaric, President and CEO; and Carl-Johan Zetterberg Boudrie, CFO. [Operator Instructions] Speakers, please begin.

[Robert Puskaric, President & CEO]

Ladies and gentlemen, good morning, and welcome to Doro's Q1 report. Today, we have an agenda where we'll go through the key highlights of the quarter. Also the first quarter more in details when it comes to our sales and how the different markets have developed, profitability and cash flow. And then we will round off this morning with concluding remarks and a Q&A session for you.Next to me, I have Carl-Johan, our CFO. And -- so let's kick off this phone conference. If we then start with the key highlights we have put together. We would, on the kind of customer dimension, like to highlight that we are gaining share in the senior mobile phone space, despite a declining markets. And that has not changed, but we are standing strong and improving our position in our segments.We would also like to highlight that we have received an initial order and signed the contract with a major virtual mobile operator in North America, meaning adding 1 customer to our customer base in North America, and that is on the 4G product that we already have going in the markets.From the financial point of view, of course, it's very encouraging to be able to show that we have a double-digit growth of 11.1% versus the same quarter last year and that we also have growth in our Product dimension, despite the challenging market that we are acting on.We also have a very good growth, of course, in the services dimension of some 62.2%. And one can then say, yes, but that is due to that we acquired Welbeing as mid of last year. However, I would like to point out, which I will point out further in this presentation that we also have an organic growth in our services business.On the market, in general, as I also pointed out, we are increasing or maintaining our market share in key markets, and this is both on Products and Services. So regardless if we're talking about our care business or our Products/phone business, we are increasing and maintaining our position. And we are continuing our activities with a number of relevant M&A activities, which are in the care services space that we hope we will be able to communicate more on.If we move from key highlights in the quarter to business highlights, and we'll start off with the category Products. We have, as I pointed out, an increase in our market share in the senior category. And we have anticipated that the market is declining and will continue to decline, and we are kind of doing our best to continue growing our market share in that space where we are active. And this is giving us a growth of some 3.8% in the Product category.The market is down and it, of course, to a varying degree, depends on which geography you're looking at. But it is double-digit declines that we're looking on when it comes to feature phones, in general.In United Kingdom, showing a strong growth. And this is us gaining traction with our portfolio, and this goes for both smartphones and the feature phones. It took some time to get them listed. And also since the market is very much controlled by the mobile operators, there is some validation and testing and approval to happen. Most of that is now done, and that's why we see that on the Product side that we are gaining traction in the U.K.Solid growth in North America. Yes, solid, 63.8%, up versus last quarter -- no, last year, I should say. And the good thing is, of course, to be able to say that we have growth in the North American markets for 4 consecutive quarters. So we are really back in North America versus where we were when I joined the company in 2017, where we had a decline for some quarters.We also, during Mobile World Congress in February presented, for some exclusive customers, our new range of products so they could kind of get the pre-glance at them, and that is both feature phones and smartphones. And most of those products will be launched at IFA in Berlin in September and adding sales in this year.We also have something that we called the grandmother experience. It's a purposely built room where we could demonstrate kind of how senior lives and what type of aid we are adding in their environment to make them being able to live at home longer.So that was a bit of business highlights in the Product category. If we move over to the service category, here we then have a very strong growth, 62.2%, primarily driven by that we have added Welbeing to the Doro Group, but also an organic growth of some 10.4%, which is showing that we are growing in the services space.And of course, I'm very happy and proud to then announce that services now account for 18% of this quarter's total sales, which is, of course, very encouraging and positive.We see a positive development in our Public Care space in Norway and in the Nordic as such we have been able to grow the number of connections with some 2,000 connections. When it comes to U.K., we have now found and hired and added a new head of our business -- of our Public Care business in U.K., which we are very happy and proud about. And we have also managed to add approximately 1,000 connections in the United Kingdom as well.On top of that, on the -- in the services space, we have launched a more consumer-oriented service called Response, which is also something that we are positioning and selling towards the Public Care sector. And this we have launched with the biggest retail chain in Scandinavia, Elkjöp Elgiganten. And the next launch that will happen in Q2 will be in U.K. So all in all, from a category Services point of view, a good performance, both organic and also with the acquisition that we have done.If we then move over to net sales Q1, again, in Product category, 3.8% higher, taking market share, and North America really adding to the growth, being 4G products and also as I pointed out, not that it's reflected in the sales numbers, but we have added 1 more customer to our customer list in North America.All in all, the net sales is up 11.1%. Also adjusted for currency, it's up 5.7%. So we have a growth here that we can say speaks even with currency effects. Of course, fueled by the service category also, we had a strong growth, both organic and inorganic from services, and it comes from both Nordic and U.K. And -- so it's not only U.K. adding subs, it's both geographies being Nordic and U.K. And as I pointed out, we have, in total, some 18.3% being services now in the company.I can also say that we managed to get a good hardware order from the care equipments, both in the Netherlands and in Scotland. So that's also encouraging that we're able to close those type of deals.If we look at sales per markets, here in total on the Nordics, we, of course, have a bit of a challenging situation where the services part are developing positively. But even if we are working very hard in our Product dimension, we are suffering from a decline in the quarter due to pretty tough market conditions.And as I pointed out, we have then launched the consumer-oriented service that we call Response, which is an alarm service for consumers connected to our alarm-receiving centers in both Norway and Sweden together with Elkjöp called Elgiganten in Sweden.So the Nordic market as such is down 0.5%. When it comes to a more challenging market is Central and Eastern Europe, has been a weaker market for more than 1 quarter now. Here, we are, of course, very exposed towards retail that has a very tough time in the German markets, in general. It has nothing to do with Doro, has nothing to do with mobile phones per se. Either it's consumer electronics retail, we should say, in Germany, where at least one of the major customers and retail chains are restructuring their operations completely. And that are, of course, putting some negative impact on our business as well. But of course, we count that we will come back in that dimension as well when they sort out their kind of way to market and how to establish themselves.Eastern Europe, on a similar level like last year, but maybe not on the level where we would like it to be. So we are continuing to working hard in Eastern Europe to get that market up.U.K. and Ireland. Here, we have a good growth, both driven from the Product dimension, as I pointed out earlier, but also then adding Welbeing that is giving us an addition of both organic growth and that we are simply adding Welbeing to this quarter, which was not part of last year.Also to highlight is then West and South Europe and a bit of North Africa where we have had a positive development of some plus 3.5%, mainly then driven by France and our strong position in the segments of senior feature phones, while South Europe, being then Spain and Italy, are more on a stable level but still with a kind of a challenge to grow it, so to say. And North America, we have talked about very strong growth, and growth for consecutive quarters now. So we are very happy about that position.And now I will hand over to Carl-Johan, who will take you through profitability and cash flow in Q1. Carl-Johan?

[Carl-Johan Zetterberg Boudrie]

Thank you, Robert. Good morning, everyone. We'll start off looking at profitability for the first quarter 2019. Overall positive with an improved EBITDA for the quarter, compared to the same quarter last year. Also including -- or sorry, excluding FX from IFRS 16, in the quarter, there's an effect -- a positive effect on EBITDA Q1 '19 of SEK 4.2 million compared to last year, but also adjusting for that positive development of EBITDA in the quarter. And this is despite lower gross margin in Products, which is mainly a result of, from the margin perspective for Doro, unfavorable FX effect. And this is mainly due to the euro/dollar relation where we -- in the end of 2017 and early 2018, I would say that relation peaked and we had a euro/dollar around $1.24. And in this quarter, we've looked at euro/dollar at $1.12, $1.13, and that's impacting our margins quite substantially in the quarter for Products. Positive is that we, in Services, have an increase in gross margin, and that's due to positive market mix. But all in all, the strong quarter for Products and high sales of Products, with a declining gross margin, led to an overall decrease in gross margin of 2.6 percentage points in the quarter. And I would say this is one of the main reasons why we are seeing slightly lower EBIT quarter compared to the same quarter last year, plus some higher depreciations and amortizations compared to last year as well from higher investment levels and from the acquisition of Welbeing last year. But all in all, we think in this quarter and during the transition to Services, we are satisfied with the level of sales that we achieved and maintaining a good profitability during the transition towards a more service-oriented company. Moving on then to cash flow in the quarter. Cash flow was at a good level in the quarter as well. Positive cash flow of almost SEK 20 million, resulting in decreased net debt. If we look at it like-for-like, net debt in the quarter was SEK 156.7 million, of which SEK 67.6 million is due to IFRS 16. So adjusting for that and comparing to end of Q4, we saw a lower net debt compared to Q4 last year as well. And we're almost at the same level as Q1 last year, preacquisition of Welbeing. And -- so good cash flow, and I think the slightly lower cash flow compared to last year is due to slightly less positive effects from working capital and timing effect on paid taxes.That was regarding a little bit on profitability and cash flow, and I now hand over to Robert for some concluding remarks and then a Q&A session.

[Robert Puskaric, President & CEO]

Thank you, Carl-Johan. I have to apologize for my voice cracking up. So to conclude this Q1 report, if we start off with the positives, of course, we are very proud that we're showing double-digit growth, and that is then fueled by both Products and Services accounting for some 11.1% in total, taking us up to SEK 466 million. It's also that we are keeping our course towards transitioning into a company being more Service-oriented. And of course, a proof point on that is that our share of total, being Services is now 18%, which is, of course, very good. Services is growing fast, and we have a double-digit growth organically. And if you add Welbeing then to the Services that we acquired, we are up on 62%. We are definitely increasing our share in the mobile phone space for seniors, and that, of course, is giving us a growth of 3.8%. And as Carl-Johan pointed out, stable result in cash flow when we're transitioning into Services. On the challenging side, yes, we do have the negative trends in the mobile phone market, in general, I should point out again. I'm pointing out that -- every quarter that the global market of mobile phones is not growing, it's actually decreasing. And we know this, this is something that we are fully aware of. And this for us being predominantly exposed in the feature phones segment that is declining even further, this is as expected. But we are managing our share of that market being a niche player in the senior segments, market share in this market, giving us a very strong and good position. Gross margin decreased, driven by currency effects and also mix of Products where we have more 4G shipments this year than we had for last year, which is changing the mix of 2G, 3G, 4G phones and Services. Our priorities ahead is, of course, to further expand our reach and develop our offering in technology-enabled care space. This is both public and private, I should point out. So we're trying to both get the privately paying customers, of which you have larger shares in some markets and smaller shares in other markets. But we need to have offerings that are technology-enabled care solutions for both private and publicly paying customers. We, of course, continue to drive the company and transform the company to be more of a service-based company, which means that we are building that type of competence and optimizing the operations and organization to be able to handle an increased amount of services and recurring revenues. I have to point out that the products and technology solutions are playing a vital part in the transition towards a more service-oriented company. May sound contradicting, but it's not. You need products and solutions in order to be able to deliver certain type of services and to be able to have the value proposition towards the market that we want to have, so that is a priority. We're also saying our outlook for 2019. The overall market for mobile phone is expected to remain challenging, as I have said. We, however, anticipate that we will maintain and increase our market share in the senior segment, as we have said before. The Services will grow organically. And we are then also active in a number of acquisition discussions right now, and we expect to continue having a double-digit growth for Services in 2019. The profitability will -- is expected to remain at a healthy level, as we have said before. So with that, that was the concluding remarks for Q1. And we will now open up for a Q&A for you, ladies and gentlemen. So back to you. Thank you.

[Operator]

[Operator Instructions] The first question is from Christian Lee, Pareto Securities.

[Christian Lee, Analyst]

The first question is regarding your comment that you need to sell products to grow your Services business. Would you say that it is more vital for you to sell smartphones than feature phones?

[Robert Puskaric, President & CEO]

It's Robert here. I would say, I'm not pointing out individual products, if it's feature phones, smartphones, what we call care phones or if we're talking about cloud-based solutions for public care or privately paying customers, I'm just saying that in order to have a unique value proposition, and in order to be able to build the company and put forward solutions that we want to have with a service rep, I think it's important that we do have certain products in our portfolio that we are building our solutions upon. I don't think that we need all of them, but we need certain key products and solutions that we own ourselves.

[Christian Lee, Analyst]

Okay. My second question is regarding your comment in the report that you have seen some price pressure increasing somewhat in procurements. Could you please elaborate a little bit on this?

[Robert Puskaric, President & CEO]

Come again? Can you just repeat that question?

[Christian Lee, Analyst]

Yes. It's regarding the price pressures that you have seen increasing in procurements. Is this specific to the U.K. market? Or have you seen this in other markets as well?

[Robert Puskaric, President & CEO]

It's more U.K.-specific in this context. But of course, I mean, we are always negotiating with our customers when we are renewing contract. But this has been specific to U.K. in this occasion.

[Christian Lee, Analyst]

Okay. So given the increasing price pressure, some would say that the gross margin that you reported in Q1 for Services of almost 48% is sustainable, going forward.

[Carl-Johan Zetterberg Boudrie]

Yes. I think what we see in gross margin for Services, we think that is a sustainable level, sort of things being the same in terms of mix, et cetera. But we don't -- even though there's been a slight price pressure in Q1 in certain tenders, I think we are committed to maintain our margin. And of course, it's always a decision for us at what sort of level we want to compete and take certain businesses, because maintaining the margin is an important part for us as well. And there are many other factors that will determine who wins a contract, and not only the price. So from that perspective, we see that we are maintaining our price level in the market.

[Robert Puskaric, President & CEO]

And I can also add to that, Christian, that of course, what we sell to the public care sector in U.K. as well as in Sweden and Norway varies because you have certain contracts that are more -- if you would put it monitoring only, that comes with 1 price where the price pressure could be tougher. But of course, you try to climb up in the value chain and add more services and more equipment to each installation, which is then driving up the price, of course, and also the value towards the customer per se. So it's not easy to kind of just pick 1 number and say -- we have gotten some price pressure, but nothing that we can't handle, so to say.

[Operator]

The next question is from Simon Granath, ABG.

[Simon Granath, Technical Analyst]

Initially, could you say some words on Welbeing's development during this quarter? Are you happy with the performance?

[Robert Puskaric, President & CEO]

Yes, we are. We're happy with Welbeing's development. We're happy that we managed to add Welbeing to the Doro Group. It's a very strategic, I will say, asset, in our group, also being done in the U.K. market, which we have several times pointed out is fragmented and it's analog as it has both be technically migrated and it has to be, from a market point of view, consolidated. And Welbeing is our vehicle. And we have actually added at least 1,000 connections in this quarter in the U.K. alone. And of course, from our point of view, this is just the start of the consolidation. So yes, we're happy with that, and we're also happy that we have -- as we have managed to get Wendy Darling to be our Head of our public care business, leading Welbeing in the U.K. going forward.

[Simon Granath, Technical Analyst]

Okay. Perfect. And furthermore, how is the M&A environment? Have you been bidding on any companies where the price has been too high? Or are there any other reasons for why any companies haven't been acquired so far?

[Robert Puskaric, President & CEO]

How many do you think we should acquire a quarter?

[Carl-Johan Zetterberg Boudrie]

No, but I think as we said before, we are actively sort of pursuing M&A activities. We have sort of constantly being working, I would say, of course, prior to and after the acquisition of Welbeing and lining up sort of the interesting acquisition opportunities. Then there are several reasons why it happens or why it doesn't happen. As Robert said before and typically, the M&A activities, they take some time before maybe everything is signed and closed. And we are actively working on sort of interesting and relevant acquisition opportunities that we have identified and that we are pursuing.

[Operator]

The next question is from Viktor Westman, Redeye.

[Viktor Westman, Analyst]

You mentioned the major operator there in U.S., I think. Is this -- should we think about this as a major tier 1 operator, the AT&T, Verizon size? Or is it a more larger tier 2 operator?

[Robert Puskaric, President & CEO]

It's Robert here. I -- of course, I understand that you're curious on finding out who it is. We can't disclose that at the moment. As I pointed out, it's a MVNO. It's a major MVNO mobile virtual operator, so meaning it's not a tier 1 mobile operator, if that answers your question.

[Viktor Westman, Analyst]

Okay. Great. And I'm also curious if you could give some more color on the launch of Response. I mean what has been the penetration in store, for instance? And are you pleased so far? What's the next steps? Anything on Response that you could share?

[Robert Puskaric, President & CEO]

Absolutely. I cannot share the specific number of amount of subscribers that we have coming from Response at this point in time. We have launched the service in Sweden and Norway, and it's online on our own web. And it's with audio/video, the retailer chain and Elkjöp Elgiganten. If we put it this way, we are not really happy with the number of subscribers that we have been able to sign up. Of course, we are working with different type of packaging of products and services in this case, which you will see on our web as well, where we are kind of, I wouldn't say subsidize. I can't say subsidizing our products with services. If you signed up and lock a subscription of Response, you will be able to get a decreased price on a Doro mobile phone. So we're trying different bundles, if we put it that way. We are also in discussion with a number mobile operators. If we can create certain specific type of senior tariffs with a Doro phone, with a Doro Response service, so let's come back on that topic. I would also like to point out that all markets are different, and the willingness to privately pay for these type of services vary a lot from market to market, meaning what does the state government municipality provide for free to an individual, versus what you have to pay yourself? And that also plays in. We are still very confident that there is a market for consumer-oriented care services, so we will continue working on that. But the number of subs that we have been able to sign up to this point is not really to our satisfaction, if I put it that way.

[Viktor Westman, Analyst]

Okay. Good. And a last follow-up also maybe on the price pressure. You mentioned a bit about the price pressure there, but I noted that Services was sequentially weaker. It's not a huge difference, but do you have any comments on that part?

[Carl-Johan Zetterberg Boudrie]

No. Yes, that's, of course, as we say, it's more a matter of sort of certain additional costs related to the core, not something we see being, call it, sustainable effect from that aspect. And overall, we do see as sort of, looking at it more from a long-term perspective, a positive trend and a healthy level of gross margin in the Services business.

[Viktor Westman, Analyst]

Sorry, I was thinking about sales actually.

[Carl-Johan Zetterberg Boudrie]

Sorry, sales in Services?

[Viktor Westman, Analyst]

Yes. And if you compare it to Q4, not a big difference, but a small dip there. If you can talk a little bit about what that was?

[Carl-Johan Zetterberg Boudrie]

And that's -- so in -- there's 2 parts. Of course, I think looking at it from a subscription point of view, we've added a few subscribers in the quarter, around 3,000 subscribers. All of those subscribers are not fully contributing yet to sales. So I think it's more of a timing effect than anything else.

[Operator]

At the moment, there are no further questions. [Operator Instructions] There are no further questions at this time. Please go ahead, Mr. Puskaric.

[Robert Puskaric, President & CEO]

Okay. Thank you. Thank you to all of you, ladies and gentlemen, that participated in Doro Q1 report call. And next time, we will have our call for the Q2 report, which would be July 12. Thank you very much for listening and asking questions. Thank you very much.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.