Doro AB

STO:DORO

Earnings Call Transcript 2019-Q2

[Operator]

Hello, and welcome to the Doro Interim Report for April to June 2019. Today, I'm pleased to present Carl-Johan Zetterberg Boudrie, CEO. [Operator Instructions] Please begin, sir.

[Carl-Johan Zetterberg Boudrie]

Thank you, and good morning, everyone. And welcome to the Second Quarter report for Doro and my first quarter report as CEO and President for Doro.I'm very delighted to be here today, and I'm fully motivated and committed to create further success for the company. I think Doro is a great company, well positioned in very interesting industry with trends such as an aging population, the increasing financial pressure for care, and growing staff incompetence deficits in care. All these challenges are of course seeking for new solutions, and we at Doro, we will create and deliver technology-oriented care services to support in tackling these challenges and create a better everyday life for seniors.I'm confident that this will drive our transformation towards the service-based company. And to achieve this, we will put an increased focus and emphasis on public care. The strategy that we have presented, it still holds and it's still intact, but with an increased focus and priority on public care. I'm equally confident that with further success in public care, we will see that the consumer market will follow. So I think with those initial words from my side, let's move into the second quarter report. So today, as we already said in the beginning, we will start with some key highlights followed by a walk-through of the second quarter. And we will finalize with a question-and-answer session in the end.So key highlights in the quarter. The growth from the first quarter continued in the second quarter of this year. Net sales increased with 8.3% compared to the same period last year with the growth in both products and services. Services increased sales with 34%, and now accounts for 19% of total revenues for Doro.We have gained or maintained market share in products, which has further strengthened our position as a market leader in senior mobile phones. Our operating profit increased with 34% compared to the same period last year, excluding restructuring costs due to the change of CEO.Some business highlights from products and then services. We have faced somewhat challenging and turbulent quarter in products on the back of, I would say, trade war and national security activities in the market. This has of course have an impact on specific players in the industry, but also overall, it created an uncertainty and an increased risk in the market, which has been a challenge and sort of dampening the entire market.Despite this, Doro managed to increase sales as a result of gaining and maintaining market share in our key markets. Especially, I'm delighted and very positive to say that we managed to grow in Central and Eastern Europe with 16% after a few challenging quarters. The growth in Central and Eastern Europe was supported by restructuring at one of our major retail customers in the market in which the restructuring affected the first quarter negatively, but we saw a positive effect of that restructuring in the second quarter. And also a large smartphone phone order in the quarter in that region. We have seen a continued good level of sales in North America and good demand for our 4G-featured phone for the North American market. And over last year, sales increased with 39%.All of this is a testament that we have strong offering and very strong position in the market, and now during the third quarter, we will further strengthening our portfolio by launching a number of new very good products towards at IFA towards the end of the quarter.For services. Services continues to increase its share of total sales and now accounting for 19%, and driving the transformation towards a more service-based company. And our initial target of 30% of sales coming from services. We've seen a good growth in the services business in the quarter of 34%, supported by both the good organic growth of 6.8% in the quarter, mainly driven by the positive development in Norway, and then also supported by the acquisition of Welbeing during the second quarter last year.We start to see a demand for a broader and digitally enabled service in this area, which is positive and creates new possibilities in the market going forward. And as said initially, in terms of priorities and focus going forward, we will put an extra focus and emphasis on public care to make sure that we develop our offering and capabilities to become a leader in the European market also in this sector.Net sales in the quarter, sales increased with 8.3% in the quarter, up to SEK 460 million compared to SEK 424 million at the same period last year. Sales in products increased with 3.7% to SEK 373.3 million in which we have gained market share in our key markets showing that we have a competitive and strong offering. And as mentioned before, extra positive that we see growth in Central and Eastern Europe in the quarter after a few slower quarters in that region.In services, as mentioned before, we saw a sales increase of 34% compared to Q2 2018 and an organic growth of 6.8%, also compared to last year. This is driven by continued organic growth in Norway, and as mentioned, the acquisition of Welbeing during the second quarter last year.And services is also growing its share of total sales, which is in line with our long-term targets and ambition to transform into a service-based company. Total sales for services in the quarter amounted to roughly 19% compared to 15% in the same period last year.Talking a little bit more specifically about our different regions. We start with the Nordic. We saw a slight decline in Nordics during the quarter, a decline of 3.9%. The good organic growth that we saw in services was unfortunately offset with negative development in mobile phones. We are maintaining our market share in the mobile phone market in Nordics, but we are facing an overall challenging market, and as a result, even though maintaining market share, we saw a decline in the quarter.In West and South Europe, we had a decline in the quarter of 10%, that was after a good and strong first quarter and also with low smartphone volumes in that region in the quarter compared to last year. Positive is that we see that we are maintaining, or in certain countries, gaining market share in feature phones and further strengthening our position as the clear leader in this area in the region.In Central and Eastern Europe, as I mentioned before, we saw a good development with growth of 15.8%, which is very positive. This was supported by, as also mentioned before, that restructuring in a major retailer in this region, which affected Q1 negatively but impacted Q2 positively. And also a very large smartphone order in the quarter.In U.K. and Ireland, we saw a sales increase of close to 30%. This was driven by the services business and then mainly from the acquisition of Welbeing last year.In Products, the quarter was more or less flat compared to the same period last year, and we suffered from certain certification issues in the mobile phone area where certain customers decided to postpone sales until those certification issues were fixed. Those problems have been resolved, and we are sort of seeing that we are getting back to a normal level in the U.K.North America continued to show good growth compared to last year. In this quarter, a growth of 39.2%. We see a continued good and stable demand for our 4G feature phone in the U.S. market.Profitability, as a starting point, I would say, which is very positive in the quarter, is we saw an operating profit increase with 34% to SEK 34.9 million corresponding to an operating margin of 7.6% when excluding restructuring costs due to the change of CEO. And this operating profit increase is driven by the positive sales growth in the quarter and also excluding restructuring cost, a very good cost control and cost management in the quarter. And this is despite looking at the declining gross margin in the quarter. The gross margin decreased with 1.6 percentage points compared to last year and amounted to 34.9%. Compared to last year, the gross margin was impacted negatively by currency effects and of course, as we have mentioned earlier, that euro/dollar ratio, that's very important for us from a marginal perspective and market mix in products. But having that said and looking at the decline compared to the same period last quarter, if we look and compare the gross margin in the second quarter compared to the first quarter this year, we saw a very positive improvement in gross margin, an improvement of 3.8 percentage points compared to Q1. And we also see that the second quarter this year is the highest gross margin since the second quarter last year, which is also very encouraging.Now even with that said, then and also important discussing services, as we said, I think in the gross margin, also something that impacted us negatively in the quarter is slightly lower margin in services as we did not deliver on our high expectations and efficiency targets that we have. And in the focus toward services and public care, this is a clear priority going forward in continue to drive efficiency and gross margin improvement in our service delivery. Including restructuring costs, EBIT was SEK 26.2 million in the quarter, which is at the similar level to last year, and EBITDA amounted to SEK 47.3 million, which is an increase of 7% compared to last year. And those numbers are including the other costs for changing CEO, the restructuring costs but it's also after the implementation and the effects of IFRS 16.Looking at cash flow in the quarter, the free cash flow in the quarter before acquisitions amounted to SEK 0 million, and this is a reduction of close to SEK 23 million compared to Q2 2018. This is mainly due to a negative impact from change in working capital driven by higher inventory levels this year compared to the same period last year.Inventories, as we mentioned before, a focus area for us. And it impacted cash flow negatively in this quarter, but comparing to Q1 2019, we see at least a positive trend in inventory with inventory slightly lower compared to the first quarter. So I am confident that we are on a right track in terms of managing inventory and reducing inventory going forward.Our net debt is still at the low level and continues to be at the low level and decreased compared to the same period last year. And excluding for IFRS 16 and a financial lease liability, including in net debt this year, the reduction in net debt compared to last year is even greater. And this net debt position gives us headroom to drive further acquisitions to build market presence and strengthen our offering in services.So that leaves me with some concluding remarks before I will open up for the Q&A session. Positive in the second quarter is we've seen growth in both products and services, and that is follow up by the growth you also saw in Q1, which is very positive.Services continues to show good growth, plus 34% in the quarter compared to the same period last year. And as a result, the share of services is increasing and now accounting for 19% of total net sales. We have maintained or increased our market share in products in our key markets, and we improved the operating profit of 34% in the quarter compared to last year excluding the restructuring cost for change of CEO.The challenges during the quarter is, we are in the mobile phone business in the market where the market situation is -- sort of continues to be challenging. Having that said, with the positive element of it is that we see we have a strong offering, and we managed to maintain or gain market share in also this challenging market environment. And we saw a gross margin decrease compared to the same period last year, driven by the negative currency effects and market mix in products. But it was the highest gross margin since the second quarter last year and the strong improvement compared to the first quarter of 2019.Priorities ahead, and as I said in sort of my initial comments during this call, I am fully committed and full of energy to drive the development of Doro and the success of Doro further. And in order to do so, we are increasing our focus on public care and services and to further develop our offering and efficiency in the service delivery.I will make sure that we develop a structure and capabilities and competence in order to become a leader in the European market for technology-enabled care services. And to drive and to transform Doro to more service-based company. And also of course, given the challenging situation in the mobile phone market, we will make sure that we are, as an organization, as a company, agile, so we can adapt to the changing market development in the mobile phone area.And also we reiterate our outlook for 2019, where we see the overall market for mobile phones is expected to remain challenging but that we will maintain or increase our market share in the senior segment in the mobile phone market. And for services, that we are seeing organic growth, and we are active in a number of acquisition activities, acquisition discussions. And as a result, we expect continued double-digit growth in services for 2019. And that our profitability will continue to be at a healthy level. So with that, I leave over to the question-and-answer session.

[Operator]

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

[Viktor Westman, Analyst]

The first question is on the -- this week market in general that you see. Can you discuss a little bit how much of this is a volume problem? And how much is more in a problem of bargaining power, competition and other kind of price, whatever?

[Carl-Johan Zetterberg Boudrie]

Yes. I think -- and so there is -- the events here during 2019, as we said, with somewhat a turbulence in the market, it's more trading some general uncertainty, more impacting, say, sales or volumes in the market. From a Doro perspective, we are true in focusing on the senior segment, and I think the development we have seen this year shows that we managed to maintain and increase market share in this market given that we have a strong offering, strong capabilities in this sector. And also from a Doro perspective, we are -- as we have that position and as we have a strong offering, we are committed to not sort of be a price leader in the sense of fighting on price, we fight by having the best products with the best functions for our target group.

[Viktor Westman, Analyst]

Very good. And I think that the -- you mentioned the broader offering in care that is being demanded, I think this is a very interesting trend, but can you talk a little bit about is there -- are any downsides or risks or challenges with this in terms of new competition coming in? And if it's -- if there's any possibility that you could lose revenue in some way in relation to this?

[Carl-Johan Zetterberg Boudrie]

Yes. I would say, in general, we see that's a great opportunity. I think of course, that the care business or technology-enabled care services is a market where we see a lot of, call it, macro factors that is driving this market in a positive way. And of course, as a result that, sort of, interests new players into this market. I think with that said, from our perspective, we have a good position. I think the main, call it, challenge or focus whilst going forward is making sure that we develop the right type of software platforms, products, and as a result, services in order to be a leader in this market and in order to make sure that we are the ones solving and sort of adhering to the customers and the consumers demands in the best way, and then also helping solving these challenges that I mentioned at the beginning. So I think of course, from our perspective and what is key is that we continue to develop our offerings so we have the most competitive solutions in the market.

[Viktor Westman, Analyst]

Yes, okay. Last question from me and on Response. I think you mentioned in the last quarter that you were very unhappy with Response so far. Are you even more unhappy now or a little bit more happy? And also if there are any learnings that you've done from this experience?

[Carl-Johan Zetterberg Boudrie]

Yes. Response by Doro is -- or so far we haven't seen the success from Response by Doro that we wished for. We've launched it in the Nordics so far in retail and online channels. What we will do and our planning for here in the third quarter is to also launch that service in the U.K., and also maybe to see if can launch within some different channels. So I think Response by Doro is actually -- it is a very good service. We haven't seen the success that we hoped for with it so far. And I think we haven't really found the best way to go to market with this service so far.

[Operator]

Okay. In that case, we now go to the line of Simon Granath of ABG.

[Simon Granath, Research Analyst]

Initially, in the Q1 report, you mentioned an increased competition amongst procurements in the U.K. Would you say that this situation has now dwindled off?

[Carl-Johan Zetterberg Boudrie]

I wouldn't say that the situation has changed in the second quarter. In general, in all markets for our care business, the second quarter has been a slow quarter in terms of new tenders in the market.

[Simon Granath, Research Analyst]

Okay. That's all clear. And also sales from the NA region decreased by 18% quarter-on-quarter. Has this had any positive effects on the gross margin for product?

[Carl-Johan Zetterberg Boudrie]

As you say, of course, there is some market mix effects in there -- in where maybe compared to Q1, there is maybe some positive effects from a market mix perspective compared to Q1. The main challenge for -- especially compared to the last -- same quarter last year, the main challenge from a gross margin perspective for product is the unfavorable currency development the last 15 months.

[Operator]

[Operator Instructions] As there are no further questions at this stage, may I please pass it back to you for any closing comments?

[Carl-Johan Zetterberg Boudrie]

Thank you very much, and thank you very much for listening today. In many aspects, I think we have presented a good quarter with strong operating profit increase, and also a good sales increase. And maybe finally, that I forgot to say during my concluding remarks, I would like to present and also welcome our interim CFO, Ronnie Ekman, who has a good background and good experience and I'm confident will be a good contribution to Doro.

[Operator]

This now concludes today's call. So thank you all very much for attending. And you can now disconnect.