Doro AB

STO:DORO

Earnings Call Transcript 2020-Q1

[Operator]

Hello, everyone, and welcome to the Doro AB Q1 2020 Results. [Operator Instructions] Today, I am pleased to present CEO, Carl-Johan Zetterberg; and CFO, Linda Nilsson. Please begin.

[Carl-Johan Zetterberg Boudrie]

Thank you very much, and good morning, everyone. I hope you are healthy and safe in this, I'd say, special times. Today, I will give you some highlights of the quarter, some more insights to the first quarter of 2020, and then concluding remarks and open up for a question-and-answer session in the end. So let's go directly to Slide 4, key highlights in the quarter. In the quarter, the growth for business segment Care continued with double-digit growth. And in the first quarter of 2020, sales represented 31% of total sales. And maybe as an introduction, as you heard, I said business segment Care. We have, from the first quarter 2020, changed our reporting structure into 2 business segments: business segment Care and business segment Phones. This is to better reflect our business and to give all of you interested in Doro a better overview of our business and transparency in how we are performing. In the quarter, we had a good gross margin improvement, especially in business segment Phones, which was driven by positive mix effects and lower freight costs. I'm positive to see that the efforts we've made in especially freight have paid off in the quarter as this was a challenging area for us during 2019.Our new hero product in Care, the Doro Eliza, which is our new welfare hub that will be released shortly, received the iF Design Award in the quarter for its outstanding design. It's, of course, very positive that what we see as a very important product for our service offering and product offering in Care, already before its launch, received a prestigious design award. And we're very much looking forward for this anticipated product launch.I think without further ado, the quarter has, of course, been impacted by the COVID-19 situation in different ways. I remember already when we talked about the fourth quarter, we were in the midst of the first challenges because of COVID-19. And from mid-January, during January and February, especially our supply chain and development partners in Asia were affected and, as a result, of course, our local colleagues in Asia.As the crisis moved towards Europe at, I would say, especially the end of the quarter in March and even more so the second half of March, of course, focus has been on ensuring that we maintain a high-quality and service level in our service business and in our alarm receiving centers. And of course, we mitigate the negative effects that we see on especially the Phone business as markets started to close towards the end of the quarter. We have taken several steps and we are taking several more steps to ensure that we handle the COVID-19 situation the best way, both short term and long term. I think I will come back to this a bit more later on in the presentation as well. So we can jump to Slide 6 and give you some more glimpse of the first quarter 2020 and our 2 different business segments, especially. In business segment Care, we see, and especially towards the end of the quarter and here in the start of the second quarter, that our offering is more relevant than ever. The services and products that we provide in business segment Care especially, but Doro generally, it highlights the importance of what we're doing and that we develop digital technology for today's and tomorrow's needs. From a sales perspective, as I mentioned in key highlights, business segment Care increased growth with double-digit. Extra positive was that the growth was mainly due to a 21% sales increase from services in the business area. We also mentioned the Doro Eliza, the new welfare hub or in Care hub, as we say here, and the iF Design Award. We have started to see, towards the end of the quarter, as the COVID-19 crisis hit Europe with full force, that signs of an increased demand for our products and services in business area Care supporting our customers, typically then in municipalities, social care and elderly to be able to live at home with maintained safety and independence. And in business segment Care, we have implemented a number of measures to ensure that we can maintain high service quality and high quality in general in especially our alarm receiving centers and in our field engineer services. So we -- as an example, we have made sure that we have divided all our alarm receiving centers into separate teams, ensuring that we can maintain answering alarms from seniors, regardless if we would have an impact from COVID-19, ensuring that our staff are able to work from home in all the different cases, ensuring that we have the right protective equipment and that we are very careful in visiting seniors in our field engineering and responder services. So all in all, we've taken many, many measures to ensure that we continue to serve our customers and the seniors in a very good way. And it's very positive to say, so far, we have managed this in a very good way. And all our -- all my colleagues have done tremendous work in ensuring that we continue to support the ones in need in a very good way. Next slide, please, and we look a little bit on sales and financials more specifically for business segment Care. As I mentioned before, sales in total increased with 11% in Care, driven by the acquisition of Centra Pulse and Connect in the second half of last year and a positive trend in services sales. Organic growth in the quarter was unfortunately flat, which was mainly a result of lower product sales in the quarter. And also, as I said in a previous slide, we are seeing some increased demand of our offering to support social care during the COVID-19 crisis. Connections in the quarter continued to grow. And at the end of the quarter, we totaled 316,000 connections into our alarm receiving centers. A disappointment in the quarter was our gross margin and gross profit, which declined in the quarter. And it was mainly due to a negative effect from the acquired entity, Centra Pulse and Connect, where our ambition and target in extracting synergies from this recent acquisition has not progressed as planned, which is a clear disappointment and something that we are intensifying our work in making sure that those synergies will be realized as soon as possible. Next slide, please. From a market perspective in business segment Care, the Nordic market increased sales with 5%. It was an increase in number of subscription with an equal amount, which is positive, meaning that we see that we are growing our service business and increasing subscriptions and maintaining our market-leading position in Sweden and Norway.In U.K. and Ireland, we grew with more than 30%. As stated before, the growth was primarily driven by the acquired entity, Centra Pulse and Connect. But also in the U.K., the reason for the good growth was growth in services, which in total, as mentioned before, for business segment Care is positive, that we see a strong growth in services. And services is increasing its share of the overall sales in both business segment Care and for the group in total. Our sales in the export business was weak in the quarter. The export business is predominantly a product-related business. And we've seen some negative, I would say, timing effects in the quarter where certain customers not placing orders in Q1. But it's more related to timing than, I would say, long-term trend in the export business. Next slide, please, and to give you some more insights into business segment Phones and the highlights for this segment and financials. Even more than Care, our business in Phones has, of course, been impacted by COVID-19. In the beginning of the quarter, our supply chain and development partners in Asia was affected, which predominantly was a challenge for our business in the Phones segment. Positively, I think we managed this situation very well, and we have not experienced large disturbances in our supply chain or in our development efforts during the first quarter.But again, as the crisis started to hit Europe and even, I would say, very late in the quarter started to hit U.S., we have seen a clear impact on a weaker market towards the end of the quarter, which was on the top of a generally weak market in the first quarter. And the COVID crisis impacted order intake negatively, and consequently, it impacted sales negatively towards the end of the quarter. And we experienced many of our main markets, such as France, Germany and the U.K., more or less being shut down towards the end of the quarter with stores, et cetera, being closed and people being asked to stay at home. Even though these are, sort of, challenging times with a weak general market throughout the quarter and then further accentuated by the COVID-19 crisis, we managed to maintain and defend our market shares in the quarter. And we are working to make sure that we maintain and improve our profitability by adapting our cost structure to ensure that we handle this situation, both short term and long term, in the best possible way to ensure that we can maintain and strengthen our market position short and long term. During the quarter, we launched our new smartphone, Doro 8050. And we now have our new smartphone portfolio complete with our hero product, Doro 8080, and now supported by some more mid-end smartphone, the Doro 8050. And positively also from business segment Phones, just as for business segment Care, we're seeing that we are getting recognized and awarded for good product development. And business segment Phones, the Doro 8080 was rewarded in the Smartphone Magazine reader choice award as the Best Senior Smartphone. Next slide, please, and sales and financials in the first quarter for Phones. All in all, sales decreased with close to 16% in the quarter for business segment Phones, a decrease that we will see on next slide, was similar in all of our main markets. As I stated on previous slide, the decline was sort of a factor of: one, a generally weak market in the quarter, and this is something that we've seen throughout all of our markets and in the mobile phone business in general. And this was further accelerated towards the end of the quarter with the COVID-19 crisis hitting Europe.Positive in the quarter is the gross margin development. We managed to increase gross margin to 30.6% from 27.1% in the same quarter of last year. And this is a result of an improving product mix in the quarter and also lower freight costs due to ongoing initiatives that we've implemented. The operating margin in business segment Care (sic) [ Phones ] was 3.4%, which is on a similar level compared to last year. And the main reason for a slight decrease is higher depreciation costs linked to new product launches in the second half of last year. If we would have excluded depreciations, the profitability in business segment Phones, the profit margin would have been higher compared to the same period last year. Next slide, please, and some more color on sales per market for Phones in the first quarter. As I mentioned on the previous slide, we've seen a similar trend in all of our markets with a sales decline of roughly 15%. In the Nordics, sales declined with 14% in a generally declining phone market, but we managed to continue to defend our market shares, and we made a successful launch with -- from a selling and listing perspective, of our new smartphone, the Doro 8050.U.K. and Ireland declined with 16%. Also in the U.K., we managed to be a little bit less affected than the market in general by focusing on the senior segment. But we see the negative effect from product mix in general where, comparing to the same period last quarter and this quarter, we've had a few products being sort of put off listings as they are phased out, and we have a number of new products coming in being listed. So there is some timing effect that is impacting us negatively in the quarter. And also, of course, towards the end of the quarter, the U.K. market has been closed as well with shops not being open. And we've seen a slower order intake in the second half of March, especially in U.K. and Ireland.Central and Eastern Europe, similar pattern, as we mentioned in the U.K. and Ireland. And we were awarded, as stated before, the Smartphone Magazine reader choice award for Best Senior Smartphone. And as in U.K. and Ireland, we've had some phase-in, phase-out effects from a timing perspective, impacting us in the quarter. West and Southern Europe also decreased with 14%. And especially Italy and Spain, of course, being the first countries severely hit by COVID-19 in Europe, we saw clearly declining sales in March in those 2 countries. In France, we've also seen a decrease in sales due to a generally weak market, as we've seen in general overall, but also towards the end of the quarter, challenges due to the virus. But positively in France is, even though it's been a challenging quarter in general, we've managed to grow sales with a few of our key customers in that region.North America declined slightly more than the other regions, a decline of 21%. The main reason for the decline in the U.S. is -- and this is compared to the first quarter of 2019 where we had very strong sales, thanks to the newly launched new 4G feature phone, Doro 7050, and as a result, high sales volume in the start of the product or life cycle of that product. In general, sales in this quarter is on a good level and on similar levels that we've seen in recent quarters. Next slide, please, and to give you a little bit insight into profitability for Doro Group. Net sales amounted to SEK 424 million in the quarter, which was a decrease of 9% compared to the first quarter of 2019. Of course, the decline, as we went through on previous slides, is driven by the challenges we've faced in a generally weak market in the Phones segment as our business segment Care grew in the quarter with double-digit figures.Gross margin overall increased in the quarter with good gross margin development in business segment Phone. EBITDA amounted to SEK 43.7 million, which is actually higher compared to the same period last year despite the sales decline of 9%. So I'm very happy to see that with a strong gross margin increase and managed to maintain pricing and improved freight costs and keeping track of our operating costs, we managed to have -- or maintained EBITDA at a similar level compared to last year. If we look at operating margin, that was slightly below last year, which is a result of higher depreciation costs in the quarter compared to the same period last year. Next slide, please, and looking at cash flow in first quarter of this year. The free cash flow before acquisitions was minus SEK 22 million in the quarter. The main reason for the lower cash flow is especially a tax -- a sort of final tax payment and tax settlement in Sweden relating to the result of 2018. So again, more of a cash flow timing than anything else, and also a result of lower trade payables in the quarter. And of course, with the situation that we've talked about, we are, as one of all the activities we are driving, we are, of course, looking into minimizing spend. And as a result, trade payables are decreasing. Net debt in the quarter, with a slight decrease in cash flow, increased to SEK 129.6 million, which is an increase from Q4 of 2019, but it's still significantly lower than the same period last year. And I would say, overall, our good financial performance in recent years have enabled a healthy financial position for Doro, which provides us strength to manage through the turbulent times of COVID-19. If we jump 2 slides ahead into concluding remarks for the quarter, Q1 positive, increasing sales of 11% in business segment Care, and even more so, a growth of more than 20% in our services part of business segment Care. A good gross margin increase in the first quarter to 33.7% compared to 31.1% in Q1 of '19. We are seeing signs of increased demand for our services and products in Care due to the COVID-19 situation. We launched our new smartphone, Doro 8050, and the design award, the recognition for our new Doro Eliza welfare hub, which means that our product development efforts are successful and will pay off. Challenges in the quarter is, of course, I would say, to a large extent, impacted by the COVID-19 situation. The work of extracting synergies from the recent acquisition, especially Centra Pulse and Connect, has not progressed according to plan and is a disappointment in the quarter. And the challenging mobile phone market continues, and we've seen a generally weak market for mobile phones in the first quarter. Priorities ahead. As long as the situation of COVID-19 continues, we expect significant sales decline in business segment Phones. And especially now looking short term, this will have a clear impact in the second quarter. We are continuing to work proactively to implement cost savings, as mentioned before, both short and long term, to make sure that we mitigate and handle the effects of COVID-19 as proactively, as strongly as we can.We wanted to continue to drive the growth and expansion in business segment Care. And we are seeing that the services and products that we deliver, they have never been more important than they are now. And there are signs of increased demand for our product and services in especially the Care segment.And as I said, one of the challenges which we need to increase our efforts in is making sure that we extract the synergies from Centra Pulse and Connect acquisition to ensure that we improve our gross margins in the service delivery. And this is while maintaining a very high quality and service level that we have, which again is even more important now than ever as seniors are more vulnerable, more dependent on the services that we and other social and health care professionals are delivering. So that was everything from myself. I would like to thank you for the first quarter presentation and open up for a question-and-answer session.

[Operator]

[Operator Instructions] The first question is from the line of Viktor Westman from Redeye.

[Viktor Westman, Analyst]

First question is on the upcoming new framework agreement in Sweden. What's the situation there? Do you see any big changes there due to the coronavirus?

[Carl-Johan Zetterberg Boudrie]

Viktor, good to hear from you, meaning that you are still healthy and safe. Good question. We've seen -- so there are -- actually, there are 2 important frame agreement tenders from SKR ongoing for us right now. One is more in terms of welfare technology and one is more the alarm handling part of it.So if we take them one by one. The first one, tenders have been submitted. Companies have performed demos for SKR. And the current time line says that a response will be given in the time frame of May. We have not yet been communicated any delay from SKR. But of course, during the current situation, it's difficult to say that they will be able to keep the time line or not. So, so far, things have progressed according to plan. But if there will be any delays or not, I think that's too early to say and difficult for me to say, yes, they haven't communicated any changes to the plan so far. If we take the second frame agreement tender that's ongoing, then the tenders are due to be submitted within the next 2 weeks. And then a response is likely to be given, sort of, summer time frame. And again, if the COVID-19 situation will have an impact or not on the timing of that tender, I think that's still to be seen. The date for submitting the tender still holds, and I don't think that, that will be delayed. But then in terms of what capabilities SKR have and what they need to focus on now, it's difficult for me to say.

[Viktor Westman, Analyst]

Okay. Good. And you mentioned for a couple of times now the general challenging phones market. Are there any projections on when this will turn around? Because that's been going on for a long, long time now, so there should be some pent-up demand, I assume.

[Carl-Johan Zetterberg Boudrie]

Yes, we hope so as well. I think given -- giving any projections on the future now is extremely difficult, and I will not even try because I can have a guess as good as anyone else. There is a huge uncertainty in not only the mobile phone market, in the general market right now, and try to have a prediction on when things will turn around. It's too early to say.

[Viktor Westman, Analyst]

Okay. And just the last one then from me. If you can say something around the distribution of the order intake in Phones in the quarter. We saw it was down 14%. But I can imagine it was better in the first part and then it became worse in the second part. And if you can sort of comment on how -- if there's any changes to the trends in this far in April.

[Carl-Johan Zetterberg Boudrie]

No, that's correct. So if we take it, especially if we start to look towards March and even more the second half of March, we've seen a large or sharp decline in order intake, which subsequently is impacting sales towards the end of March and in April. And I would say the situation in April so far is very much similar to the situation in second half of March as the majority of our markets have been closed throughout a higher month of April, more or less, looking at Spain, France, Italy, U.K., Germany, which has been more or less markets in lockdown for the last 5, 6 weeks.

[Operator]

Next question is from the line of Christian Lee from Pareto Securities.

[Christian Lee, Analyst]

I have 2 questions, please. The first one is regarding the order intake. You have your stated comparable numbers for '19. So if you could please disclose the total order intake, including the Care business.

[Carl-Johan Zetterberg Boudrie]

Christian, good to hear that your fighting spirit is high as well, not just for Viktor. Good question. But the total order intake number is not the figure that we have disclosed here in the first quarter due to -- and I think we've discussed this in previous quarterly calls, there is a different mix, so to say, in order intake and order book for business segment Phones and business segment Care, and the relevance in terms of order intake is more from a business segment Phones perspective, why we focused on showing a number in that segment.

[Christian Lee, Analyst]

Yes, understandable. But if we compare apples and apples, I think the reported order intake in Q1 last year was SEK 486 million. So compared to that number, would you say that the order intake in Q1 '20 decreased? And could you kind of give us some color on the magnitude of the decrease?

[Carl-Johan Zetterberg Boudrie]

If you look at -- I would say, the main difference in order intake in Q1 '20 compared to '19 is within business segment Phones. The order intake from business segment Care is at a similar level compared to last year.

[Christian Lee, Analyst]

Similar levels, although you have the acquisition of Centra Pulse and Connect?

[Carl-Johan Zetterberg Boudrie]

No, you're correct. I was looking at sort of including -- so pro forma wise, but otherwise, correct. Including -- or excluding acquisition of Centra Pulse and Connect in Q1 last year, then the order intake would be subsequent -- similar amount, around SEK 50 million higher from Centra Pulse and Connect numbers.

[Christian Lee, Analyst]

Okay, very good. My second question is regarding the gross margin in Care. You're obviously not pleased with the level in Q1. And if you would have reached the level of progress in reaching the synergies from the acquisition of Centra Pulse, could you please give us some kind of sense of what kind of the gross level you would have reached then?

[Carl-Johan Zetterberg Boudrie]

Yes. Good question, Christian. I think there's 2 things impacting Q1 to some extent. The majority is Centra Pulse and Connect and, as you say, the disappointing synergy extraction from the acquisition. The second element of it is we've actually driven some additional costs in especially then our alarm receiving centers to ensure that we can maintain the same service level and quality during COVID-19, both, as we said before, making sure that we have taking every precaution to have our alarm receiving centers opening and well-functioning 24/7. But also, we've seen some higher amounts of alarms in then especially March and here in April, as I would say. So the worry and need from seniors, to some extent, has increased. And also, they are, in certain areas, they are not receiving the same amount of visits from social care, which then, of course, leads to increased contacts to our alarm receiving centers. So those 2 areas have impacted gross margin in the quarter. If we take just Centra Pulse and Connect or, as we've discussed before, what we see long term and the efficiency work that is ongoing, but that we need to put extra focus on and accelerate even though -- while continue to make sure that we handle our service in the best way during COVID-19 is to reach a gross margin level of around 45%. And if we would have managed to do Centra Pulse and Connect, that would have given us and maybe improving gross margins level with, say, around 2%, just looking at that isolated.

[Christian Lee, Analyst]

Okay, very good. Is it possible to give us some kind of a ballpark on the extraordinary costs related to COVID-19 in Q1?

[Carl-Johan Zetterberg Boudrie]

It's a little bit difficult to say exactly how that will pan out as it is impacted by other effects where maybe we will get some reliefs from the government in terms of sick pay and other items. But I would expect that it has impacted gross margin with maybe 1 percentage point in the quarter.

[Operator]

[Operator Instructions] We have a question from the line of [ Karl Lumpkin ] who's a private investor.

[Unknown Attendee]

I have 3 questions I would like to get some more light on. First one is, what is a reasonable EBIT margin in a few years in Phones and Cares?

[Carl-Johan Zetterberg Boudrie]

Karl, nice to hear from you, and good question. If we take in general and what we communicated before, looking at our Phones business, we see -- and if we say operating margin, that Phones should be in sort of single-digit operating margin and that we are targeting sort of the upper half of the single-digit margin bracket, so, say, between 5% and 10%. And if we say in business segment Care, this should be a double-digit operating margin business where we should have margins above 10% in that area.

[Unknown Attendee]

Do you think it's possible to sell or spin out the Phone business segment if it doesn't turn out that the stock market appreciate it enough?

[Carl-Johan Zetterberg Boudrie]

I think that's maybe a question for others to answer. Our focus is making sure that we maintain our very strong market position that we have within senior mobile phones. And I would say leveraging the brand equity that we have in the Doro brand being a recognized and highly -- see, this is difficult work for me in English, requisite phone, hard to say it, brand in especially Europe for seniors.

[Unknown Attendee]

Okay. And final question. Do you think it's possible that you can make another acquisition during these circumstances with corona? Or is it more likely that it will happen at the end of the year?

[Carl-Johan Zetterberg Boudrie]

I think these situations could actually open up for new opportunities from an acquisition perspective, and we are working actively in that area also. Of course, there are sort of 2 aspects to it. One is making sure that it's the right time to acquire someone because some companies can be in a little bit of a special state during the crisis. Second is, of course, that we need to manage our company financially in the best way.But with that said, we do see there are interesting opportunities in especially Care, maybe, to look at the acquisitions at the moment because we foresee that maybe smaller companies are struggling and potentially having a challenging time in meeting their service and quality targets in order to deliver the right service. I think we mentioned this before in other calls, especially in the U.K., it is a fragmented market with roughly 200 alarm receiving centers, which many are small alarm receiving centers.And we do think, as a result, during the crisis or as a consequence of the crisis, some of those companies will decide this is not the core of what we do or we do not have a capacity and capability to run this in a way needed and decide to divest that business. So we are actively working on it. And I would say, of course, it takes two to tango, so it's always difficult to say if and when an acquisition will happen. But it's active work ongoing, and I would not be surprised if this could lead to an acquisition earlier than year-end.

[Operator]

And there are currently no further questions registered. I'll hand the call back to the speakers. Please go ahead.

[Carl-Johan Zetterberg Boudrie]

Thank you very much, everyone, for listening in to our first quarter report. It is special times. We are doing a lot to make sure that we can support the most vulnerable people of society during these times. I think we see that our offering and the work we do is more important than ever. And this is something that we need to make sure that we continue to support society and continue to drive and position Doro as a leader in this area.And finally, I just want to say thank you for listening in. As I said early on, please make sure that you take care of yourself, that you stay safe and that you stay healthy.

[Operator]

And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.