Doro AB

STO:DORO

Earnings Call Transcript 2024-Q1

[Jorgen Nilsson, executive]

Good morning, everyone. Welcome to Doro's Q1 report for 2024. Today are imminent CFO, Isabelle Senges, and myself, Jorgen Nilsson. These are the numbers.

We will start off with some key highlights, as always. Then we'll zoom in a little bit more in the details on the first quarter, and then we'll have a closing and open up for Q&A.

[Operator Instructions] We'll have a look at the key highlights. So our sales in quarter 1 came in just shy of SEK 195 million, which is almost 7% down compared to the same quarter last year. And this is, of course, a noteworthy decline, we do know that.

But the main reason for this decline is a one-off major deal in fixed line Frabel last year, it was about SEK 10 million itself. There's also a major nonstop of Doro product sales in DACH, like the one-off Motorola deal we did in Germany last year. And then this year, we also have an increased so-called revenue recognition, which was this year, almost twice as high as the quarter last year.

So this year, we're about SEK 22 million, and last year, we were at SEK 13 million. This is, of course, then SEK 22 million that will come into Q2 instead. That's nice.

All this together, all things like, we would actually have had a small increase this year in Q1, if it hadn't been for these one-off deals last year. We also feel it was particularly positive and encouraging to see that both our feature and smartphones did had an increase in both the sales and margins.

And the main drop actually is the fixed line, which continues to decrease, but that's nothing new. But every now and then, we do get extra deals like the one we had at Orange last year. What we do still need to get going is, of course, our sales of our innovation and the new products. But the underlying business is doing very well.

Speaking of innovation, at the Mobile World Congress in Barcelona, we introduced our new Doro DoorBell, which we will now be shipping in May, and we have very good hopes for it. And with the DoorBell, we do feel that we have added yet another very suitable product to the innovation portfolio.

So despite the decreased sales and also more investment, as we said before, in product innovation, we also had higher cost in marketing, and then there was some extra cost one-off, once again, for the change of Doro management. I think that was about SEK 4 million, including the recruitment.

So despite all this, I would say that we were quite resilient, and we managed to deliver very good margins at 42% which is a 6.2 percentage point increase of the gross margin in the quarter. Likewise, our EBIT is very stable and basically flat compared to last year. And then that's even with the additional cost of the Doro management change.

So the EBIT at SEK 3 million, 1.6%, so slightly higher even than last year. The main reason for this is the good product mix that we've had and the strong gross profit always benefits from this product mix. And now of course, we have more 4G feature phones than before with a higher margin than the 2Gs.

Then as I pointed out before, the decrease of our non-Doro products in mainly Germany, that declines the overall sales, but it increases the margin. And then in addition, hats-off once again to our efficient logistics department of very good cost control [indiscernible] purchasing. So we have really good tight control in components and materials, et cetera. And likewise, our operations guys are keeping the inventory at a good level. So all of this also further bolsters our margin.

Finally, as a key highlight in the quarter, I'm sure that you all know that the Red Sea transports have still not resumed. So we, like everyone else, experienced some extra 10 to 11 days of shipping times.

At the same time, in this quarter, there were massive rises in airfares because a lot of big companies in Asia from [indiscernible] started booking. But since we've done a good planning on way ahead and mainly maybe use of sea transport, we only had a minor impact on the transportation costs. And that's not so much more to say about the quarter 1, but once again, sales, 6.6% down. But once again, if it hadn't been for the one-off fixed line deals last year, we actually would have had a slight increase.

Super strong gross margin, I think, 6.2 percentage point out, that's very strong, and then also a stable EBIT. If we look in more detail on the first quarter and we look at the regions, I will say that we see the positive demand continuing for senior products. Our customers, the retailers, et cetera. They're all saying that sales in general consumer electronics is not going so well, but the Doro is still benefiting being a specialist in senior.

And we think it is reassuring that both our feature and smartphones are doing better both regards to sales and margin and that can only once again emphasize that we're focusing on the right segment. If we do look at the regions, we see that Nordics for ones dropped to SEK 47 million. One of the major reasons was that we now face challenges with newer and smaller distributors, which are competing with our, let's call them, larger and established players from before.

In addition, there has been and still is quite some uncertainty, how to deal with the new EU Ecodesign Directive and how those should be interpreted. Some of our customers also had larger-than-usual inventory and did therefore, not place reorders.

Then again, if we look at the Nordics upside, I would say the smartphone is performing well and also our sales in the Baltic showed very good momentum. Overall, the Nordics was still down 9% in terms of sales.

West and South Europe and Africa, net sales declined to SEK 80 million. But here, the decrease is entirely explained by that lower fixed line sales, as I said. And that was a SEK 10 million deal, I think, last year to Orange in Q1 '23. Other than that, Frabel keeps on going very, very good, has good momentum, and we saw increased across all sales channels with retail performing particularly well as they now have completed the switch to 4G. Overall, the region down 4% as a result of the one-off deal.

Moving on. Central and Eastern Europe once again dropped now to SEK 29 million. But this quarter, it was, as I pointed out before, chiefly due to that one-off order of non-Doro products that we had in Q1 last year. As part of our old distributor in Germany, which we are now divesting, we were still selling non-Doro products at that time. So that increased the sales revenue, but the margins were very, very low.

Otherwise, we do see that there is now the first signs of the shift from 2G to 4G also in Germany. So that's very nice. So going forward, we will be pushing our 4G products heavily in Germany as well as our Doro-branded products, of course.

And then we have also, during the quarter, worked, I would say, tirelessly with the divestment of our subsidiary, IVS. So we expect to be able to conclude the sale of this logistics and fulfillment subsidiary within the coming month. And after that, I will say we have a purely sales-focused structure for Germany, and that should be fully operational during Q3 and Germany, down minus 20% -- 21%.

Finally, the positive region this quarter, U.K. and Ireland, up 6%, only region that was actually raising. The net sales reached at SEK 38 million. And now I would say it's the sales of our Doro feature phones in general and the 4G, especially that continue to grow. We do still sell 2G in the U.K., but 4G is very much the volume driver. It's also very pleasing to see that our smartphones are doing well in the U.K. I would say they are on a positive trajectory, mainly thanks to increased listings.

Finally, we can say U.K., our Doro online sales, as always, in the U.K. keeps on doing very well. [indiscernible] you still see that West and South Europe is dominating in terms of sales, 41% of the sales, followed by Nordics having almost a 25% and then U.K. and Ireland 20% and Central Eastern Europe at 15%. But we do expect the German region to increase this over the second half of the year.

Should we dive in a little bit to the sales and profitability numbers? Over to madam.

[Isabelle Senges, executive]

Yes. So here is a recap of the main numbers. The net sales landed short of SEK 195 million. So as Jorgen mentioned, a drop of 6.6% compared to same quarter last year. Again, dwell on what Jorgen said, and even though we cannot be satisfied with the decrease in sales, it is important to point out that our main business of feature phone and smartphones did not decrease.

The categories which did decrease and main one being fixed telephony are traditionally including less premium products and the decrease of these categories actually translated into increased gross profit margin. The other major component of the margin improvement year-on-year is the continuous increase of 4G feature phones and the steady sales of smartphones.

Due to this change in portfolio mix, we could then, in this quarter, deliver a strong margin of 42%. Inbound freight, even though facing rerouting due to the attacks in the Red Sea and despite increased air rate, did not affect our margin negatively this year nor our capability to deliver on time.

Another positive factor is our inventory continuing on a decreasing trend. Operational costs increased this quarter, again, a major part of the increase related to one-off costs in connection with the change of management. The run rate, however, also increased a bit, and this is the result of the reinforcement of our product and marketing teams during 2023 and in the first quarter of '24.

The EBITDA was SEK 11.9 million compared to SEK 15.2 million last year, and the EBIT landed at SEK 3.1 million compared to SEK 3.2 million, which is 1.6% of net sales versus 1.5%. The profit after tax ended up at SEK 6.1 million compared to SEK 3.6 million last year, giving earnings per share of SEK 0.25 compared to SEK 0.15 last year.

Cash flow. Cash flow from operating activities was better this quarter than the same quarter last year at SEK 4.6 million compared to minus SEK 10.6 million. The improvement was driven by a better change in working capital due to lower inventory and higher accounts payable. Investments for the quarter were SEK 4.8 million versus SEK 4.3 million last year. And the free cash flow ended up at minus SEK 0.2 million compared to minus SEK 14.9 million.

Looking at the balance sheet, we had a total cash at the end of the quarter of SEK 200.5 million compared to SEK 125.1 million last year. The equity ratio is 59.5% versus 54.2%. We finished the quarter in a net cash position of SEK 186.7 million, which is an increase compared to previous quarter, where we were at SEK 180.1 million, and in an even more significant increase compared to same quarter last year when we had a net cash position of SEK 50 million. This was my last number.

[Jorgen Nilsson, executive]

That was your last number. Okay. Wrapping up and then we'll open up for Q&A. As I said, on the positive side, I would say that we had a robust performance of our feature and smartphones. We both increased sales and margins. And I think that's particularly encouraging. Also, our early change to the better portfolio mix with 4G paid off.

Likewise, once again, we have to laud our very efficient logistics department as well as our firm cost control and when it comes to purchasing because the margin on products is very good. And then I also think that the restructuring of the German business is starting to pay off. Yes, sales is dropping, but then again, we are getting rid of the non-Doro branded lower-margin products. So 42% gross margin, which is 6.2 percentage points up compared to the same quarter last year. I think that's quite impressive.

Then also, we continued with our product innovation and despite that increased investment in product innovation, also the higher cost we had for the new resources that we added and the more marketing and e-com, and then, of course, the costs related to the change of management, we still have a stable EBIT on par with last year's 1.6%. So I think that's very positive.

Challenges, as Isabelle pointed out, it is a decline overall. But once again, it's mainly as a result of seasonality, revenue recognition and the one-off fixed line deals.

Then still no transportation via Red Sea. That's fine for us, even though it takes longer time, we still manage to do it, but we are a little bit concerned about the quickly or the rapidly increasing transportation cost in terms of flights.

Air rates have been going up. It's actually at the same price or even higher than it was during COVID, I think. And then, of course, it's still a very limited sell-out of our new innovation products. So we're pretty okay to sell in to our customers, but the sellout still works to them. So we are still investing in new ways of selling out and assisting our customers, especially on the retail side with new sales and marketing initiatives.

And one thing that's worthwhile mentioning is the implementation of the USB-C Directive and the Ecodesign Directive. The USB-C Directive, I think, comes into play by end of this year. The Ecodesign Directive is around the 20th of June next year. So you will see a lot of hardware, consumer hardware electronics companies dumping prices on products left, right and center, because most of their products maybe do not comply with the Ecodesign Directive.

All our new products are doing, and we are working -- that's why we are releasing new feature phones, new smartphones, et cetera, during this year. But that, of course, has been a big challenge and a lot of work has been put into that.

Priorities ahead. Well, as I said, we need to continue working on new ways of sell-out, especially in hearing bells and the video doorbell. We've created 2 separate streams on that. I don't want to go into the particulars of that, but I think we're into something really good here.

We also continued the implementation of strategy with a new product road map and the new sales and marketing initiatives. And then finally, we hope to finalize the divestment of the German distribution and logistics operation. So we can complete the DACH reorg and have our DACH sales team start delivering on its potential, that should be taking place now in May and then into Q3.

I think that pretty much concludes not so much this quarter.

[Jorgen Nilsson, executive]

So maybe we should open up again. So we will ask [ Baptiste ] to please open up the microphone. I see there's already 1 guest who has a question. Is that you Fredrik?

[Fredrik Reuterhall, analyst]

Yes, it's me. So let's start with the strong gross margin. I mean we have been talking about this before for some time. And I would say that the normalized gross margin would be around 38%. I mean do you agree with this throughout the year? Do you think you're going to see a higher level going forward?

[Isabelle Senges, executive]

I would say a bit higher because of our 4G. And then again, you never know, we always say that after such a report, probably our factory will come back and increase their price. But as I see it, I think we will be probably around the 40%. Also our innovation product will be having a very decent margin as we hope, so we're in the range of 40%.

[Fredrik Reuterhall, analyst]

And this goes for, I mean, next 3, 4 years as well or is it just 2024, you think?

[Jorgen Nilsson, executive]

We're not supposed to make forward statements, right? I think that's asking a lot. But I mean -- yes.

[Isabelle Senges, executive]

Yes. It depends, of course, on the development of our innovation products and which category we are going to [indiscernible] Then also the market phones, but as I see it, I mean, we are trying to stay on such a trend. This is what we want to do, so that we can then have resource to -- or a possibility to invest in our development team and others. So it is what we are trying to achieve for sure. Then, I mean, we are not so big, so sometimes just a big change in currency can affect the margin by 1% or 2% up or down from a quarter to another. So my 40% are reservation.

[Jorgen Nilsson, executive]

But, I mean, in general, at Doro, we have a very strict pricing Director, Mr. Skattenborg in Norway, he keeps our Sales Directors very tight here and has a very close relationship with myself and Isabelle all the time.

So we -- I mean, especially when it comes to our phones business, we always want to claim that there is a premium to be paid for Doro products, and hence, we really much maintain that. And again, our customers, the indirect customer, so to say, the retailers and operators, they can recognize that because their end users, they are willing to pay extra for our products. So it's always been our strategy to keep a good margin. And then also, we have to laud our operations, our procurement department, they are very good. They're working tirelessly to identify components at a good price.

[Fredrik Reuterhall, analyst]

Okay. Interesting. Momentum for 4G phones is still very high. But I mean, if it take away the one-off, the fixed line deal that pushed down revenue in this quarter. Can you talk something about volume and price, I mean, except for this fixed line drop?

[Jorgen Nilsson, executive]

Volume and price of...

[Fredrik Reuterhall, analyst]

Yes, of the other products, yes, exactly that...

[Jorgen Nilsson, executive]

Yes. So in general, we can say the volume is dropping compared to 2G. So we've seen that across the years. On the other hand, we get much better paid and there is a much better margin. On the downside, there is also a higher royalty and license fee on the 4G products. But overall, the number of -- the volumes in terms of feature phones have declined compared to when we sold mainly 2G. Maybe you have the details there?

[Isabelle Senges, executive]

Yes. In value, we are close to a double-digit growth for smartphones and a bit less for feature phones.

[Fredrik Reuterhall, analyst]

And you're right in the report that switch to 4G is almost done in France more or less and then the U.K. and Ireland. So left to push sales due to these 4G switches in Germany, what do you are about that or...

[Jorgen Nilsson, executive]

Yes, I think that's a fair statement. But when we say it's done, that means that the customers, our customers, so the indirect customers, the operators and retailers, they have direct [indiscernible], so they want to do this now. It doesn't mean that there are still not 2G customers out there that has to migrate.

But if you go 1 year back, when we spoke to, let's say, retailers in France, there was just like, "No, we're not interested in buying 4G. We just want to buy 2G." And then it was a bigger problem because our 4G, because of the higher costs, were more expensive than maybe a competitor of 2G.

Now our customers, especially retailers in France, they're all going, "Okay, now let's go 4G." So they've bought a lot of 4G phones, and then the end users are still taking a long time. Because we have to accept that the majority of people who are still on a 2G feature phones, they are almost exclusively seniors. And they are on a 2G feature phone for a reason that they basically just use it for voice calls and maybe some SMS.

So they are very reluctant to change. And many times, the mobile operators, they either have to push them or incentivize them. And that's why we've had some deals before with some of the major operators in France, especially, where we let them -- the operators subsidize the price of the migration.

[Fredrik Reuterhall, analyst]

Okay. And you also wrote that you lost some sales in the non-Doro products in Germany. But with this new sales structure in place, hopefully, within a month-or-so, how fast do you think the revenue will come back in Germany?

[Jorgen Nilsson, executive]

Again, no forward statements. Honestly, I don't know. But what I can say, we didn't lose. I mean that was a conscious decision. We basically walked away from some of these deals. So our German subsidiary, IVS, they were a distributor of Doro and various other brands, quite well-known famous brands. There were quite some volumes a couple of years ago. I would still say there was decent sales revenue, but very little margin on it.

So yes, it paid off on the top line. But ultimately, if you look at the efforts, it didn't. So it was actually a conscious decision as part of the strategy we're doing now to walk away from these deals. And when will it be back? I think, I mean, for our German sales team, the few people who stay with Doro [indiscernible] instead of staying with IVS, they will probably be able to fully focus now on sales from Q3.

Hopefully, -- I mean it started to increase already their focus, I would say. They're also moving out of the offices, which we have today in Hamburg and moving to a new office in Munich. So it'll be clear that one is the subsidiary that we've sold and the other one is the new sales Doro.

[Fredrik Reuterhall, analyst]

Okay. Good. And then on the selling expenses, it was quite high, I mean, much higher than my estimates, about SEK 47 million in the quarter. I mean how hard will you continue to push marketing activities for the rest of the year? I mean, we had like SEK 188 million for the full year last year. I mean, would you go over SEK 200 million? Or this is the push there's going to be and then it's going to be more or less in line for the rest of the year or...

[Isabelle Senges, executive]

I mean, since we are releasing the HearingBuds, the DoorBell, really it's a new product, and we are aware that for the moment, Doro is just known as a big button telephone company. So we really need to come out and let people find out that we are more than that. So there will be some marketing and sales expenses, but it's under our control. There is no worries about the EBIT, if I would put it like this. There will be more costs than last year.

[Jorgen Nilsson, executive]

That's also part of the fact that, I mean, during the downsizing years we took away basically all of marketing and most of the product managers. Now we rehire them. And it took some time to find the right people. We have a brand-new marketing director just started now in April. So we're building up this. And of course, the costs they go accordingly. But it is per our budget. Obviously, you are not aware of that, but that would not jeopardize the EBIT as we see it. That's not plan at least.

[Fredrik Reuterhall, analyst]

Okay. That's fair. And then my last question here is you wrote in the report and you talked about it, an additional cost of SEK 4 million due to the change of management. But I guess there will be additional costs. I mean when you are departure, Jorgen?

[Jorgen Nilsson, executive]

That is the cost of recruitment for the new person as well as my departure.

[Isabelle Senges, executive]

Yes, we have integrated them in the Q1 following the accounting laws.

[Fredrik Reuterhall, analyst]

Yes, no more extra cost regarding that then?

[Jorgen Nilsson, executive]

Not unless you feel that you should pay me extra, which I would appreciate, of course. No, joking aside, no, as per accounting laws, we're supposed to take that cost directly when it's arisen. So it's all taken on in Q1. So if you take that aside, that would probably be an extra SEK 4 million. So we would add double EBIT this month, I would say, or this quarter otherwise.

[Fredrik Reuterhall, analyst]

That was all for me. And thank you very much, Jorgen, for your time here at Doro and good luck in the future.

[Jorgen Nilsson, executive]

Thank you, Fredrik. Appreciate it.

We have questions from more people? I still see Fredrik's hand is up there. No, maybe also just point out that we have the Q2 report on the 17th of July, so it's 1-7, instead of 11th July as we said before. The 17th of July will be the release of the Q2 report. And for all those who have followed me and Doro during these years, I want to thank you very much. It's been a pleasure. And I'm really, really happy for Doro and for the future. I think Julian is going to be a fantastic addition to the team. So thank you, and good luck.

Thank you. Bye-bye.

[Isabelle Senges, executive]

Goodbye.