Doro AB

STO:DORO

Earnings Call Transcript 2020-Q2

[Operator]

Hello, and welcome to the Doro AB Q2 2020 Results. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO Carl-Johan Zetterberg Boudrie. Please go ahead with your meeting.

[Carl-Johan Zetterberg Boudrie]

Thank you very much, and welcome, everyone, to our presentation of Doro's second quarter 2020. With me here today, I also have our CFO, Linda Nilsson. Next slide, please. Today, we will give you key highlights, present the second quarter and wrap up in the end with concluding remarks and a Q&A session. So we can move to Slide 4 and key highlights. The second quarter was, in many ways, impacted by COVID-19. Sales overall, and especially business segment Phones, was impacted negatively in the quarter as a result. But during -- especially June, we saw a gradual improvement in sales. With several measures implemented, we have managed to maintain our service levels and quality of service throughout the quarter and throughout the pandemic. We took very early and very effective measures to reduce costs and protect cash flow in the quarter. Successful execution of these activities resulted in a positive operating profit of SEK 7.8 million and a positive cash flow, despite the clear decrease in sales predominantly as a result of COVID-19. Also to accelerate the strategy execution and our ambition of becoming a European market leader in technology-enabled care, we reorganized the business into 2 separate business areas, Doro Phones and Doro Care, which will increase focus, speed and ownership of the respective businesses. We will also restructure the business and reduce operating expenses by SEK 110 million to SEK 130 million from 2019 levels, predominantly in Doro Phones. This to ensure the right focus, long-term profitability and cash flow. Next slide, please. And moving into the second quarter, and we can move to the next slide, being business highlights for business segment Care in the second quarter. As I mentioned before, we have taken several measures to ensure that we will continue safe and high quality of service as well as reliability, measures that have been successful in the quarter, and we managed to maintain our high level of -- and quality of service throughout the entire quarter, despite the effects that we've had from COVID-19. Sales of services in business segment Care increased with 18% compared to last year, and this is predominantly an effect from the acquisition of Centra Pulse and Connect. Although overall, it was a slow quarter with few new tenders as health and care commissioners focused on the immediate effects of COVID-19. So overall, sales in the quarter in business segment Care is a disappointment and not up to our expectations. From a positive side, our efforts to improve gross margin and profitability within business segment Care have started to pay off, and we see that the synergies and extracting the same from our last acquisition of Centra Pulse and Connect last year are starting to pay off. I would say, overall, the pandemic have highlighted the challenges of today's solutions in Care. Combined with already acute challenges, such as a growing elderly population, shortaging of care professionals and funding gaps, we believe that this can serve as an increase in demand for technology-enabled care going forward and accelerate the digitalization yet to happen in many markets. Next slide, please. And looking at sales and financials for business segment Care. In total, sales increased with 14% in the quarter compared to last year. As mentioned for services as well, the increase was driven by the acquisition of Centra Pulse and Connect. The quarter was slow with new tenders, but we did see some additional product-related sales, especially in the U.K. early in the quarter as a result of COVID-19. Overall, in products, sales was lower compared to last year driven by a negative development outside our core markets in product sales. And as I mentioned in the highlights of business area Care and especially an increased focus on improving organic growth is a key priority going forward for business segment Care. I think despite the strong focus to maintain service levels and quality of service, we also managed to, in parallel, improve profitability in business segment Care in the quarter. Gross margin improved to 44.9%, which is a high point for the last few quarters, and especially positive effects of extracting synergies from the Centra Pulse and Connect acquisition contributed positively. This resulted in also the operating margin improving to 11.9%, which also is a strong improvement from last year and from the first quarter. Next slide, please, and looking a little bit more on sales per market in business segment Care. Sales in Nordics, we saw a slight decline in the quarter. A combination of low activity from social care commissioners, also in the Nordics, combined with some lower product sales in Norway and a lost contract in previous quarters impacted sales in the Nordics negatively. This was also impacted negatively from currency effects with the weakening Norwegian krona in the quarter. In U.K. and Ireland, we saw a strong increase from both the addition of Centra Pulse and Connect and underlying growth in the U.K. business. We -- as mentioned before, we did see some strong product-related sales in the -- early in the quarter as a result of COVID-19 efforts taken by social care commissioners, ensuring that seniors could stay at home and to be safe during the midst of the pandemic. In rest of the world, we saw a weak product sales in the quarter with, in general, low activity in the market. If we take next slide, and we move over to business segment Phones. Sales in business segment Phones was significantly impacted by COVID-19, especially the first 2 months of the quarter experienced a significant decrease in sales, but a gradual improvement -- we did see a gradual improvement during June. And at the end of the second quarter, the order book was 18% higher than at the end of the first quarter, indicating that there was stronger demand towards the end of the second quarter. We also did see online sales increasing during the quarter and hitting all-time high for us. It's albeit from a low level, but still a positive development and a clear increase from previous online sales levels. And also especially business segment Phones, we implemented early and effective cost- and cash-reducing activities, staff reductions, spend freeze, inventory reductions, and many other measures offset almost all of the profit that was lost due to the lower sales levels. Also in Phones, the pandemic have emphasized social exclusion and loneliness. Our products and senior mobile phone offerings can support seniors to overcome these challenges. And for us to contribute to the most affected members of society during COVID-19, we started an initiative called the Doro Do Good, where we, in the quarter, donated phones under this initiative, as said, to the most vulnerable society and seniors during the pandemic. Next slide, please, and looking at sales, financials for business segment Phones in the second quarter. As we mentioned, sales for business segment Phones declined in the quarter. In total, a decline with 41% compared to the same quarter last year. Many of our core markets faced a complete lockdown during April and large parts of May. We did see that many markets started to slowly open up during the second half of May. And as they started to open up, we could see an improved sellout from our customers already towards the end of May, which resulted in a gradual improvement of sales for us during June.The gross margin in the quarter was stable in relation to the last few quarters, indicating that we managed in a good way to maintain our price levels during the pandemic as well. And our operating profit was just below 0 in business segment Phones as we managed to offset a large amount of the impact from lower sales with the successful cost measures. Next slide, please, and looking a little bit on sales per market for business segment Phones. In the Nordics, sales declined with approximately 21%, which is a decline slightly below the other regions. And it's especially the Swedish market that did not suffer the same lockdown as many other markets that supported sales in the region and maintained sales at a higher level compared to our other regions. West and South Europe and Africa declined with 40%. Our key market in the region, France, showed a good recovery in June and good gradual recovery in June for many of our key customers in that market. Combined with good online sales in the market as well, the region declined less than the other main market, excluding Nordics, as we just mentioned. In Central and Eastern Europe, U.K. and Ireland as well as North America, the shutdown of our key markets in those regions and some gradual but somewhat slower return on sales in the quarter resulted in a clear decline in those 3 regions. But as we mentioned, overall, we started to see a gradual improvement during the final stages of the quarter, and the order book was at a higher level in end of Q2 compared to end of Q1. Next slide, please, and looking at figures for the group. In total, net sales for the group was SEK 332 million. And as we mentioned earlier in the 2 business segments and especially business segment Phones, the decline was mainly an effect of different COVID-19-related impacts. Gross margin improved compared to the first quarter. And also said, we managed to maintain our margin in business segment Phones, and we managed to strongly improve our gross margin within business segment Care, especially as we start to see effect from extracting synergies from the Centra Pulse and Connect acquisition. And the gross margin improvement combined with our effective and resolute cost-reducing activities during the quarter resulted in a solid EBITDA of SEK 38 million and an EBIT of close to SEK 8 million, despite the lower sales levels as a result of COVID-19.Next slide, please. And as we mentioned, in addition to the cost-reducing activities, we also took a number of measures to ensure that we improve working capital and cash flow. And successful implementation of these activities as well resulted in a positive cash flow of SEK 29 million in the quarter. This also resulted that -- or in our net debt decreasing further to SEK 100 million at the end of the quarter, including the financial lease liability from IFRS 16.We can move into next slide and the next slide after that and concluding remarks. So Q2, in short, priorities ahead. As I said in the beginning, the Q2 quarter for us, just as for many, many others, have been, in many ways, impacted and a testament to COVID-19. From a positive point of view in Q2, we have managed to maintain and deliver high-quality service throughout the quarter, both in our Care business and also in our Phones business in terms of delivery, support, et cetera. Also, our strong efforts in ensuring we control costs during the pandemic and the quarter resulted in maintaining a positive operating profit and a positive cash flow level. We did see that markets have started to open up during the second half of the quarter and the gradual recovery of sales in the later part of the quarter, especially during June, in many of our key markets. And also, finally, positive and happy to see that gross margins within our Care business have improved and that we're starting to see some results from the work in extracting synergies from our acquisitions. The challenges in the quarter have, of course, been, to a large extent, COVID-19-related. We did suffer from weak sales in many markets, especially in the mobile phone business, as key markets were in complete shutdown for at least half of the quarter. We also saw fewer public procurements as health and social care commissioners turn their focus on handling the immediate effects of COVID-19. But overall, still, our level of sales and our organic growth development in business segment Care during the quarter is a disappointment and not up to my expectations. And that leads us also to our priorities ahead, which, of course, even though we hope and we've navigated through what's hopefully the eye of the storm in a very good and strong way, it's too early to say that the pandemic is over. So we need to continue to ensure safety for our employees and customers and, of course, continuously manage the effects from the pandemic to ensure that we continue to deliver high quality and high reliability in our services and our products. But also, we need to accelerate our strategy execution. We have an ambition of becoming a European market leader in technology-enabled care. And to accelerate this execution, we now fully implement a new organizational structure where we create 2 distinct business areas in Doro Phones and Doro Care to ensure the right focus, the right ownership and the right flexibility to do and achieve our strategic ambition and for each business area to be the best they can be. We will also, in the -- on the topic in accelerating our strategy execution, restructure our business with the ambition to reduce cost of more than SEK 100 million compared to 2019 levels. This will predominantly happen within Doro Phones as we, in business area Doro Phones, will focus our efforts to the markets, to the product and to the customers where we have the strongest position and the both -- the best opportunities for the future. This also to ensure a long-term profitability and a long-term continued healthy cash flow. So with that, I would like to thank you and open up for a Q&A session.

[Operator]

[Operator Instructions] Our first question comes from the line of Simon Granath from ABG.

[Simon Granath, Technical Analyst]

Carl-Johan and Linda, just a couple of questions from my behalf. First, which operating cost will be primarily cut in light of the restructuring program? Is it R&D cost? Sales cost? Just some clarification on that would be very helpful.

[Carl-Johan Zetterberg Boudrie]

Simon, and thank you for the question. We are overseeing, I would say, the complete business and especially within business segment Phones, and that means, as I said, we will focus on the markets, the customers and the products that are our most profitable and our strongest ones. So that will lead to -- cost-reducing activities will likely happen in all areas. So we are looking into both sales- and marketing-related costs, product development-related costs, call it supply chain-related costs, et cetera.

[Simon Granath, Technical Analyst]

Okay. When you say that June has showed a recovery, it would be very helpful if you were able to quantify this, perhaps if you could split up the quarter on a monthly basis or simply try to compare the month with some rough figures. Would you be able to do that in terms of the order intake?

[Carl-Johan Zetterberg Boudrie]

Yes, or if we say, as you say, order intake and if you look at the order book, then, of course, order book was, as you saw, better in end of Q2 than end of Q1. And sales levels in the quarter and then, of course, especially for business segment Phones, there was a gradual improvement in June. I'd say April and May was, to a large extent, at similar levels sales-wise for business segment Phones, where we saw, of course, a little bit, depending on market, clear declines in sales, with maybe sales levels around 30% to 40% of last year and then a gradual improvement in most markets during June.

[Simon Granath, Technical Analyst]

Okay. Perfect. You report that the amount of subscribers is down quarter-over-quarter. Which market does this relate to? And has the lost subscribers been completely churned out now as of Q2? And as a final question on that, why did you lose the tenders?

[Carl-Johan Zetterberg Boudrie]

Thank you. So as you said, yes, we did -- the number of subscribers declined in the quarter, which, of course, is a disappointment. And I would say most -- the connections are, yes, they are churned out in Q2. They are maybe not fully impacted, so to say, from Q2, but they are churned out during Q2. And the loss, as we said, one is loss of connections in Norway, where one municipality decided to insource the service instead of keeping it outsourced, so to say, or an external service provider. And also in U.K., there was a combination of, one, a previously lost contract in the U.K., I think, impacting us negatively with roughly 4,000 connections; and secondly, resulting in the improved gross margin in the quarter. We did close one of our monitoring sites in the U.K. during the quarter. We previously had 3 monitoring sites in the U.K. as a result of the Centra Pulse and Connect acquisition. One of those sites we closed during the quarter and transferred connections into the other sites. In that work, in transferring site or transferring connections, there was also a sort of a thorough walk-through of the connections in the system in which we did also remove some nonactive connections in the system, which also impacted the number negatively, but it has no revenue impact.

[Simon Granath, Technical Analyst]

Okay. Perfectly clear. As a final question, could you quantify on what Centra Pulse and Connect contributed with -- in the Q2 numbers?

[Carl-Johan Zetterberg Boudrie]

I think Centra Pulse and Connect are roughly on the levels we've said before, where Centra Pulse and Connect are -- on a yearly basis, the revenue from Centra Pulse and Connect have been roughly, say, SEK 60 million, with a quarterly impact of around SEK 15 million.

[Operator]

And the next question comes from the line of Viktor Westman from Redeye.

[Viktor Westman, Analyst]

Yes. I just have a question on the -- on online sales. I saw that, in general, smartphone online sales has -- was up by a huge amount in April, and something [ went ] up to from 13% to 33%. I just wanted to ask how you think about online sales. Is this something temporary? Or is this a threat for you?

[Carl-Johan Zetterberg Boudrie]

I think online sales is -- still, the physical channel, I think, will continue to be an important channel for us and for our customers. So I don't see the physical channel going away. But of course, online has become more important and especially during the pandemic, and it would probably be going forward as well. So from that perspective, one, we have seen a good growth in our online sales in the quarter, and that's hopefully something that can continue as online becomes more important. But also, of course, since we sell to the large operators and the large retailers in many of the large markets in Europe, online is, of course, a key channel for them as well. So from that perspective, yes, online is and will continue to be a very important channel for us and for our customers.

[Operator]

[Operator Instructions] And as there are no further questions, I will hand it back to the speakers.

[Carl-Johan Zetterberg Boudrie]

Thank you. Thank you all for joining and listening in. And I would like to just finally say that continue to stay safe, stay healthy, and we wish you all a great summer. Thank you all.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.