Doro AB

STO:DORO

Earnings Call Transcript 2022-Q1

[Jorgen Nilsson, executive]

Thank you very much, and good morning, everyone, and welcome to the Q1 2022 webcast for Doro. With me, I have Isabelle Senges, our CFO, and I'm Jorgen Nilsson.

Those are our key highlights. Then we'll have a look at the first quarter of '22. We'll have some concluding remarks. And then we'll also open for Q&A session. And we have receive 2 questions from 1 person already in the U.S. So let's proceed.

Key highlights. The 2 -- the 3 top key highlights of the year is that despite the decline in sales in most of the Consumer Electronics business, Doro actually managed to grow our net sales by almost 3%. In addition, we've had very positive feedback from some of our major customers for our continued ability to supply in general but also on time and with very good quality.

And thirdly, we have now launched our new range of smartphones and feature phones in all our regions. And in addition, and maybe more importantly, the innovation products, the new categories with innovation products are continuing as per plan.

So if we proceed, we can zoom in a bit on them. So Q1 of 2022, we had expected to be the first quarter to return to normal, let's say, post COVID. Alas, what we initially saw is that this meant that customers, after 2 years of shopping consumer electronics, now turn their interest to mainly services and experiences instead of home electronics.

Then actually, after this, the Russian invasion of the Ukraine, which have seen this cause spikes in electricity and food prices, triggered inflation and made a previously difficult situation with regards to our supply and especially logistics even tougher. But also, and maybe more importantly, the Russian invasion had, in general, negatively contributed to raising concerns and worries among the European population.

With this situation, 2 years of already shopping home electronics and the general inflation and the general worry from the Russian invasion, we've seen very little activity in our customer shops during quarter 1. The buying has very much come to a standstill.

Nevertheless, as I said, we still managed to increase our sales, even though slightly, to almost 3% compared to the same quarter last year, which I think is very strong given, as I said, that Q1 has been challenging for the entire consumer business as a whole.

Then I would also like to say that in addition to the growing of sales, we have had almost overwhelmingly positive feedback from some of our major customers, and we're talking about major operators and retailers, for our way of successfully continuing to managing both our inventory and customer delivery despite the general severe supply logistics challenges.

And of course, the Russian war in Ukraine has further triggered problem with transportation because now transports can no longer fly straight from Asia to Europe. They have to circumvent both Ukraine and Russia.

In addition, as I said, we have launched our new smartphone and feature phone ranges across all the regions. We had a bit of a sneak launch already by Q4 in the Nordics. And we're really happy to see that.

And we think that those, together with the price increase that we've communicated for Q2, should also help us regain our margins because, to be honest, our gross margin did decrease to 32% during Q1. The main reason for that was, of course, the component prices and the continuing challenge in logistics, as I just said. Transportation prices have gone up a lot.

Also in terms of new products, we are on a path where we are focusing heavily on innovation. We have planned for 3 completely new categories to be launched during the year. And everything is progressing as per planning. And we still hope to release all 3 new categories at the IFA show in Berlin in September -- or late August, early September.

What more can we say? Yes, our EBIT margin go down a little bit by my background history. So our EBIT margin was quite down compared to same quarter last year. But this is, of course, as I said, much higher COGS, much higher cost of goods and, of course, also higher OpEx as we have now rehired the people that left us in combination with the split plus as we're investing now heavily in new products and developing the organization. That's pretty much what we can say on that one.

If we zoom in on our regions, we've had a negative development both in the Nordics and what we call Frabel or West and South Europe. The main reason for that is that we had very good Q4 in both of these regions. Then as our customers' customers start coming to the shows, our customers have had very little sell-out. So they all have good stock levels going into the new year.

On the upside, at least in the Nordics, we've seen a very nice traction in the Baltic countries to our new 2G feature phones there. So that's good. In Frabel and especially in France, the inflation, the price spikes but also the general focus towards the French election, presidential election, has meant that customers have been having their focus elsewhere within electronics.

Then our 2 positive regions have been U.K./Ireland and DACH or Central and Eastern Europe. In U.K., you could say that the big rise that we're seeing 65%, almost 66%, is of course in the light of the poor Q1 in 2021, which was then completely locked down because of COVID.

But during this Q1, we also saw a major intake from one of U.K.'s biggest retailers, who will now have a promotion. So you will see the Doro feature phones -- the Doro senior phones to be listed in this major retailer's all shops during the year to come, which is, of course, very happy.

And in terms of DACH, Central and Eastern Europe, our net sales increased by almost 20%. But here, the region benefited mostly from the strong export business. And here, there's is -- we're talking about PMRs, walkie talkies and stuff like that. So it's not the natural Doro. But also, we had a very good development in our group and distribution channels, which showed a positive trend.

Overall, between the regions, the distribution between the regions in terms of sales were quite similar with Frabel, West and South Europe, being the biggest; Central and Eastern Europe, DACH, being the second biggest; then Nordics accounting for almost 1/4; and U.K./Ireland for slightly south of 20%.

Okay. So I'll leave the word to you.

[Isabelle Senges, executive]

Yes. I will take over and give a bit more numbers, some would be repetition from Jorgen [indiscernible].

The net sales in Q1 amounted to SEK 204.6 million, which is an increase by 2.9% compared to quarter 1 2021. As Jorgen mentioned earlier, the quarter was quite challenging for the entire consumer electronics sector. The people's focus had been elsewhere. We can see that the consumers' attention is more on buying basic goods now such as energy and food.

So I think we can be quite pleased with being able to report a growth in sales and especially pleased to see the development in U.K. and DACH, our 2 regions which have been struggling and have had some tough quarters previously.

Gross margin for Q1 ended up of 32.0%. It's a decrease of 3.1 points compared to Q1 2021. The decrease is not of concern, it's fine. It doesn't come as a surprise. The component price has increased many times in the last period and now hitting our cost of goods. We also have higher inbound freight and we all know the situation for the transport and the logistics from China.

Other costs included in our gross margin are very much stable like our warranty cost, our outbound freight and so forth. Most probably, the pressure on the margins will continue in the coming months, considering the situation for the incoming quarters. We do, however, continuously look after a measure to mitigate this. There will be -- there has been a price increase early Q2. And we optimize our portfolio all the time to try to recover good margin level.

We can have a word on other operating costs, also called OpEx. There is also here a slight increase in Q1 in OpEx versus previous year. Again, this was expected. Jorgen mentioned that the activity did start again beginning of the year, mostly sales and marketing activities, visit to customers, participation in fairs, et cetera.

We also have another full cost of being -- spending alone in our own organization after all the speech with Careium. And we have cost associated with our strategy of broadening our portfolio and going into new categories. So of course, this margin and those costs affect the profit and EBIT amounted to SEK 3 million in Q1 this year. It corresponds from an operating margin of 1.5%. We can just mention that our EBIT is also hit by SEK 1.2 million of late costs from the separation of the carrier.

If we go over to cash flow and financial position. Cash flow from the operating activities ended up at minus SEK 4.9 million (sic) [ SEK 9.4 million ], which is better than the previous quarter at minus SEK 36.4 million. Of course, this cash flow from operating activities is affected negatively by the lower profit. But there is quite a positive effect from a better working capital than previous year, having in mind that previous year's cash flow numbers are including the care business.

The cash flow from investing activity was minus SEK 4.8 million versus minus SEK 11.2 million previous year. We did not have a very high level of investment in Q1. It's mostly a timing effect. It is usually like that in our business. We see investment going up in the coming months and quarter. Again, last year, investment included care business.

Our free cash flow ended up minus SEK 14.2 million versus minus SEK 47.6 million last year. Cash flow from financial activities were minus SEK 77 million. This is due to us reimbursing a part of our bank loan at SEK 75 million.

The cash and cash equivalent ended up at SEK 91 million. The net equity ratio is 49.9% versus 56.4% last year, again, including care business.

Our net debt was minus SEK 8.40 million. So quite at a breakeven between liquid funds and interest-bearing liability.

That's the conclusion on this cash flow and financial position, we do have a negative free cash flow in Q1. It's often the case in our business, but we have quite a strong financial position.

[Jorgen Nilsson, executive]

So we'll just come with some concluding remarks and then we'll open up for Q&A.

So on the positive side, as I said, even though it's been a very tough quarter for the entire consumer electronics, we did have a small increase in sales versus same quarter previous year. We have continued to have a very efficient management of our supply and warehouse. So big thank you to our operations department for that.

And we've also had very good customer feedback in general on our ability to continue supplying, both during these 2 years of COVID and also now during the first quarter, when others had difficulties.

In terms of the challenges, of course, as I said, the general economic anxiety with increasing inflation, food and electricity prices in general and then, of course, the war in Ukraine, which has set people in Europe worrying and being less -- or more hesitant to spend money.

Also, after 2 years of the home shopping, if you like, with a lot of focus on buying home electronics, people have now started turning to other products for consumer, especially experiences and medical service. And then as a result, the activities in our customer shops have almost come to a standstill or very few customers in the shops.

Therefore, in terms of our priorities ahead. Number one is that we need to start stimulating sales to get sales back into the shops. But that is not only us, it's the entire business.

We will also continue what we call a transformation of our DACH region. You know that we are transforming our DACH region to become the same setup as all the other regions. So we can get back on a very good trajectory that we hope that will be.

And then finally, and I think this is the most important is that we will have success in the launch of our new 3 innovation categories. As I said before, everything is still progressing according to plan. And we hope to be able to show and launch them at the IFA show end of August, early September of this year.

I think by that, we open up for questions and answers.

[Operator]

[Operator Instructions] We have a question from Rebecka Gärderup from ABG.

[Rebecka Gärderup, analyst]

One question from me. You have earlier had a very good supply chain management. And -- but I noted that you mentioned that the prices -- yes, the prices have increased in this quarter and will probably continue to do so.

But what do you expect? Will there be any transportation problems? Would you likely not be able to deliver due to these component problems? And what -- could you give us a flavor about the outlook? And what do you believe about that, please?

[Jorgen Nilsson, executive]

It's very true, what you're saying. In general, the transportation is a tricky situation and indeed, of course, not become easier with a big war breaking out and transportation has to go further detour.

What we have done now is that we've been basically signing deals. So we've been buying transportation capacity for the entire year at a fixed price. So in that way, we have both secured transportation for the entire year. And we also try to hedge the price of transportation for this full year.

So that in itself was a tricky situation. We managed to get that through, our operation department did. And that, we think will -- I mean they are not at price levels where we would have liked to see them. Of course, they're much higher than they used to be. But at least, we have this predictability. And also by securing this for the full year ahead, we have secured the possibility of transportation.

That said, things can still happen. The war can expand. There can be further supply problems in Asia in terms of components. So even if we might still be able to transport, there might not be enough component.

But so far during these 2 years and especially during Q1, our operations department has been very successful in securing the components and shipment.

We have also secured components for our inventories but not what you might see in the report. Our inventory has gone up quite a lot because there was Chinese New Year, there was a war breaking out. So we made sure that we secured components and started shipping them into Europe. I'm not sure if that responds to your question.

[Operator]

[Operator Instructions]

[Jorgen Nilsson, executive]

I'm going to say maybe that we've had 2 questions via mail from Niklas Sävås from Red Eye. Should I just read them maybe?

[Operator]

Yes, of course. Please go ahead.

[Jorgen Nilsson, executive]

So they were written in Swedish, so I'll do a translation as we go, but it's from Niklas Sävås from Red Eye.

And he says, can you please describe how your initiative to develop the new products developed during the quarter?

And I elaborated -- I touched upon it before. But I can elaborate that everything is still progressing as per plan. We still have very good hopes that we will be able to show and launch our 3 new nonphone categories by IFA show in late August, early September.

And for those of you who might have followed us, you might know that we are saying that our new categories, we divided them in smart home and smart health. And without going into the specifics of the types of products, I could say that 2 of the new categories are within the smart health area and 1 is within the smart home area. And as of later this week, I have not seen anything to the contrary than everything is progressing as we hope.

We've had some sneak previews with some of our customers. We thought this was very interesting and that they're very happy to see Doro coming back to the consumer arena.

So hopefully, we'll see you all at IFA. You can actually try out the new categories. And once again, I just want to emphasize these are nonphone categories. It's new things from our [indiscernible].

Now the second question from Niklas Sävås from Red Eyes, what measures are you taking to minimize the problem of increased costs? And how much room is there for a price increase?

And I think that ABG also talks -- Rebecka also talks about before. But one of the things that we said is that we try now to secure -- we have secured transportation for the entire year at a fixed price.

And once again, it was not a price that we would have liked to see 2 years ago or 3 years ago, of course. But at least, we secured the transportation capacity and we know what price we probably have to work with for the rest of the year.

And yes, there is a room for a price increase. Rather, we have already communicated to our customers that as of Q2, there is a price increase. So that will take into effect now in April.

Then we're still continuously optimizing our portfolio as we call it. But we're trying to always get rid of products that we're not making so much money on. We deal with constant evaluation of which products give a better margin and better prices. And then we push those and we try to end of life the other ones.

Then we're also further trying to focus on our online sales, which we will try to boost. I did see here now that after COVID now basically in Q1, the online sales are starting to drop back to the normal ratio from before.

Hopefully, that answers a little bit of your question, Niklas. Otherwise, you have to mail us ASAP. Are there other questions maybe?

[Operator]

Thank you. We don't have any further questions over the phone. Back to you. Thank you.

[Jorgen Nilsson, executive]

Well, then we thank you for your attention. And the next report will be on Q2, which is mid-July. And we wish you all a very good weekend.

[Isabelle Senges, executive]

Have a good weekend. Goodbye. Bye-bye.

[Jorgen Nilsson, executive]

Bye-bye.