Doro AB

STO:DORO

Earnings Call Transcript 2019-Q3

[Operator]

Hello, ladies and gentlemen, and welcome to the Doro Interim Report for July to September 2019. [Operator Instructions] And today, I'm pleased to present Carl-Johan Zetterberg Boudrie, President and CEO; and Ronnie Ekman, Interim CFO. Speakers, please begin.

[Carl-Johan Zetterberg Boudrie]

Thank you very much, and good morning, everyone. So Carl-Johan Zetterberg Boudrie here together with Ronnie Ekman to present [Audio Gap] highlights for the quarter. Overall, I would say, this quarter has a number of things, which I think is very good from a perspective in the transformation that we're undergoing and that we've talked about before, moving Doro from a more product-oriented company into a services-based, technology-enabled care company. So in the quarter, and with the acquisition of Centra Pulse and Connect in the -- towards the end of the third quarter, services now accounts for 20% of revenue from the full year perspective. So we are moving towards our long-term financial target with services accounting for at least 30% of overall revenue. We also grew services with 17% in the quarter. So we see a good growth in services continuing. And that means also that we are moving towards our target of 30%. Also, the organic growth in services was at a good level in the quarter with double-digit growth organically and then additional growth up to the 17% with the acquisition of Centra Pulse and Connect that helped our growth from 1st of September. Also, the operating margin is on a level where we're moving towards our long-term financial target of 8% in operating margin. Excluding for acquisition costs of Centra Pulse and Connect in the quarter, our operating margin was 7% in the quarter. And we continue to be market leader worldwide for senior mobile phones. And we see -- and I will come back to that a little bit more later in the presentation, that we continue to be #1 and increasing market share in all of our major markets, maybe with some exception in the United Kingdom this quarter, which I will give some more color on later on. And also with the acquisition of Centra Pulse and Connect, we are now the market leader in telecare in Sweden, in Norway and in the U.K. So I think all those things are evidence that we are moving in line with our transformation and towards our long-term financial targets that we have communicated. So with that, I move into the next part of the presentation, giving you some more highlights of the third quarter and our different categories. Starting off with category products. During IFA, which is I would say Europe's largest consumer electronics fair that's held in Germany every September in Berlin, we launched 5 new mobile phones, and this is in combination with some other product launches. It's the largest product launch that Doro has undergone through our 45 years. So we launched one new flagship smartphone, the Doro 8080, and 4 new feature phones, of which 2 being 4G feature phones, 1 3G feature phone and 1 2G feature phone. And you can see the phones we launched in some different forms and shapes in the picture on the right and as you see, what we also did in updating and improving our portfolio is that we did a new common design language. So there's a much more stringent, and I would say, a much nicer looking design to all our new products, and there's a clear Doro design that flows through all of our products from 2G feature phones up to the flagship smartphone. The introduction of the new phones have been successful to date. With that said, we are in the phase of more sell-in of the new products. So far the response we've received from our customers has been good. The products have received good listings. And of course, we are hopeful that we will see a good result from consumers as well as a good sell-through numbers, but it's a little bit too early to have a clear view on that. But so far, the launch has been successful in terms of selling and listings at our customers. One of the challenges we've had in the quarter is that we continue to see negative effects from the certification problems or certificate problems that we saw in second quarter affecting the United Kingdom. That led to sales stop at certain key customers in the United Kingdom, and that has also affected sales in Q3 significantly, while we have had a very weak quarter in the United Kingdom in Q3. The problems are resolved. We are sort of back on the shelves at the customer. But we do see that this is likely to slow down part of the fourth quarter as well as it -- unfortunately, it takes time to get all the products out of the shelves again and sort of restore sales to previous levels. But except from the U.K., overall, we've had a good quarter and continue to be -- we sort of -- we don't follow the market. We continue to have sales at a good level. We actually managed to grow in a number of regions in the product area as well, meaning that we continue to manifest our position as the market leader in senior mobile phones and increasing market share in many regions and channels. Moving on to category services and business highlights. One of the highlights in the quarter is, of course, the acquisition of Centra Pulse and Connect. So with Centra Pulse and Connect, we now have an even stronger position in the U.K., actually being a market leader in the U.K. and handling close to 200,000 connections in the U.K. alone. But also what it gives us is a stronger foundation and a stronger team to continue to drive growth in the U.K., which we see is a very important market going forward, given being the largest telecare market in Europe and the digital transformation still to happen. So with the acquisition, we have strengthened our position in the market and to be -- continue to be a leader and a driver in the digitalization in the U.K. telecare market. With Centra Pulse and Connect, a positive organic growth in the quarter as well. And services now accounts for slightly above 20% of sales in the group in a full year perspective, which I said before, we are moving along the transformation that we've set out and towards our long-term financial target of at least 30% share of revenue from services. Continued good organic growth in the quarter in services mainly driven by Norway, which has had a good development in the year, winning new contracts and expanding our services that we deliver under certain contracts. So in total, the organic growth for services was 11%. The challenging part with the good growth we've had in Norway is, it has impacted our gross margin in services negatively. We'll come back to that a little bit more later, but it's a key action for us going forward, making sure that we restore our previous margins in services and become more efficient in service delivery. And I am hopeful that we will improve our margins, as I said part of that margin decline this quarter is due to teething problems in implementing a new contract in Norway. I think as we said in the beginning, now with the acquisition of Centra Pulse and Connect and our good organic growth, we are now the market leader in telecare in our current 3 home markets, in Sweden, in Norway and in the U.K. Moving on to net sales in the third quarter. Overall, net sales grew by 2.5%, reaching SEK 521 million in the quarter. Looking at rolling 12 sales Doro now as a Group reached over SEK 2 billion in sales, which I also think is the first for the company coming over the SEK 2 billion barrier. For sales in category products, sales was in par -- sales was on par with last year. As said before, we had a good quarter in many regions, managing to grow or maintain sales in Nordics, in Central and Eastern Europe, in South Europe, but challenging in the U.K. where the certificate issues burdened us significantly in the third quarter. For services, our sales grew with 16.8%. Of course, partly fueled by the acquisition of Centra Pulse and Connect, which was consolidated from 1st of September. But even without Centra Pulse and Connect, we grew organically with 11.1% in the quarter compared to the same quarter last year. So I would say, continued good growth in services and the organic growth mainly driven by Norway, where we've won, I said before, a number of new contracts through the year, adding new connections, but we also managed to expand the services we deliver in certain contracts in Norway. So delivering a broader offering to certain councils in Norway. And services now accounts for 20-plus percent on the full year perspective, looking sort of the full effect of Centra Pulse and Connect. So in services, this is a key focus, as we said, going forward. So we are continuing to build our competence and offering in services and in care to further drive our organic growth and improve our position in the market and manifest our market-leading position where we are. Sales per market in Q3. As said, Nordics, overall, good development in the quarter, both from services, where Norway was the driver for the growth in services in the quarter and actually a good quarter in product as well where we are taking further market share and really sort of taking our position as the market leader. And I would say, especially in the Nordics, we've had a very successful selling of the new products and very good response from our customers on our new feature phones and especially on our new flagship smartphone, the Doro 8080. Central and Eastern Europe, which we talked about for a number of quarters historically, where the market from a consumer electronics perspective has been very challenging for the last 18 months, at least and that has, as a result, impacted us negatively in a number of quarters historically. Last quarter as well as in this quarter, we've managed to have good growth in Central and Eastern Europe and are sort of continue to take market share and further increasing our lead as the senior phone market leader in Central and Eastern Europe. And also in Central and Eastern Europe, and of course, since the consumer electronics, the IFA being in Germany, there's a lot of interest from customers in that region. And the response we've received on the new product launches has been very positive in Central and Eastern Europe as well. West and South Europe was on par with last year or a slight decline. We are maintaining our market shares in general in that market. And we are also seeing that we are growing and taking market share in some of the important channels going forward, like retail, for example, which is a good sign going forward. North America has been a very positive outcome for us during the entire 2019, and that positive trend continued in the third quarter, and we continue to see good demand for our 4G feature phone, the Doro 7050 that we sell in the U.S., and we grew in the quarter with 36% compared to the same quarter last year. The drawback, as we already discussed, from a regional perspective is United Kingdom. If we start with the positive aspects of the United Kingdom is, of course, again, the acquisition of Centra Pulse and Connect and we also see some organic growth from, I'll say, our operations in care and services in the U.K. prior to the acquisition of Centra Pulse and Connect. So basically, the Welbeing acquisition that we did last year, but for products and the mobile phones, it's been a challenging quarter where the certificate issues in the second quarter continued to affect sales in the third quarter significantly. I think as said before, the problems for -- in regards to certificates are resolved. We are coming back in the stores of our customers. But unfortunately, it takes some time to get everything sort of back to where it was before the certificate issues or hopefully better. And as a result, we see that this is likely to have some negative impact in the fourth quarter as well in the United Kingdom. With that said, we move into profitability for the third quarter, and I then hand over to Ronnie Ekman, our Acting CFO.

[Ronnie Ekman, Interim Chief Financial Officer]

Thank you. Though the overall gross margin in third quarter decreased to 31.1% compared with 31.5% last year, for products, the gross margin increased to 28.6%. However, the margin in Q3 has been negatively affected by currency effects and high logistic costs. The margin of product is expected or likely to increase in Q4, mainly due to lower logistics costs. For services, the gross margin decreased to 42.4%. As Carl-Johan said before, strong growth, especially in Norway has temporarily driven increased cost to handle the implementation and the normal savings for new contracts. Down to EBITDA for Q3 increased SEK 3 million to SEK 57.3 million. EBIT amounted to SEK 46.5 million, excluding acquisition costs of SEK 2.7 million, corresponding to an operating margin of 7%. Including acquisition costs, EBIT amounted to SEK 43.8 million, with an operating margin of 6.5%, which is in line with last year. Our focus in Q4 will be to improve gross margin for both products and services. The improved operating margin of 7% is a step in the right direction towards our financial target of 8%. Next slide, cash flow, third quarter 2019. Free cash flow before acquisitions amounted to SEK 40.8 million compared with SEK 31.5 million last year -- SEK 31.4 million last year. The increase is mainly driven by the improve in working capital. Net debt decreased to SEK 142.4 million compared with SEK 154.6 million in Q2 this year, despite the overfunded acquisition of Centra Pulse and Connect. The equity assets ratio at 44.4% end of Q3. The decrease compared with Q2 this year and Q3 last year is mainly driven by the acquisition of Centra Pulse and Connect. And I will hand over to Carl-Johan again.

[Carl-Johan Zetterberg Boudrie]

Thank you, Ronnie. And before I will hand over to the audience, if there are any questions, I just would like to give some concluding remarks and summary of Doro's third quarter 2019. As said in the beginning of the call, I think there are a lot of good things to take from the third quarter. The acquisition of Centra Pulse and Connect taking Doro to a market leader in the U.K. telecare market and bringing even stronger foundation for us to continue to drive growth in Europe's largest telecare market and also, meaning that we are now market leader in Sweden, Norway and the United Kingdom in telecare. We successfully launched new range of mobile phones with our flagship smartphone, the Doro 8080 and 4 new feature phones and have had good response and good selling from customers, which is very positive. We see that excluding United Kingdom, we are increasing our market share and manifesting our position as the leader in the senior mobile phone category. And I said in the beginning, we are seeing evidence that the transformation continues at a good pace and our long-term financial targets, we are closing in on them, so to say, where we are moving in the right direction in reaching both 30% of services in total sales and also reaching our long-term profitability target of operating margin of 8%. With that said, we've, of course, had a few challenges during the third quarter as a key priority, making sure those challenges are removed going forward. I would say the most significant part in Q3 is, of course, the sales drop in the United Kingdom due to certificate problems. And as said before, the problems are fixed. We are getting back into the shelves of the customer, but it will take some time to restore sales, and we think that it will have some negative impact also in the fourth quarter. The challenging mobile phone market in general continues, and of course, we are in a market where there's not underlying growth in mobile phones, while we need to make an extra effort every day to continue doing what we do, so we increase our market share in senior mobile phones. And also one of the significant parts is, of course, the gross margin decrease that Ronnie talked about before. Both year-over-year and also quarter-over-quarter, where, especially for products, the negative currency effect continues to impact us significantly, as the euro-dollar is going in, for us, in an unfavorable direction when it comes to gross margin and also very high logistic costs in the quarter, partly due to good demand from our customers and also the launches of our new products, which has driven some increased logistic costs to make sure that we get the products to the customers in the quarter and then also in services, where there has been an unsatisfactory loss in gross margin in the quarter. The main reason for it is the increased services -- direct services costs in Norway, which is, to a large extent, driven by personnel costs from overtime and temporary resources during the third quarter to manage with implementation of new contracts and the summer peak that typically comes. Having that said, this is not a situation that we're satisfied with and a situation that we can accept continues. And that's why looking at priorities ahead, this is one of the key things for us to work very hard with in order to make sure that we continue to improve our margins and restore the good margin level that we've had in services in the past. Also, of course, priorities ahead is making sure that we integrate Centra Pulse and Connect in a good way. That process is running as planned so far and to continue to do that to make sure we get a strong platform and foundation as we can to drive further growth in the United Kingdom. And then, in general, it's continued to have a very high focus on our services and public care business to make sure that we develop our offering and our efficiency to continue to grow with a good margin level in services. From an outlook perspective for 2019, we reiterate the outlook we gave in the beginning of the year, where we see the overall market for mobile phones is expected, and we see that it has continued to remain challenging. But Doro is maintaining or increasing our market share in the senior mobile phone segment. Services to grow organically and then fueled by acquisitions, and we are expecting a double-digit growth for services in 2019. And the profitability for Doro is expected to remain at a healthy level. With that said, I thank you very much, and I open up for any questions from the audience.

[Operator]

[Operator Instructions] And first is of the line of Christian Lee at Pareto.

[Christian Lee, Analyst]

I have 2 questions. One is regarding the gross margin of services if you expect it to be normalized already in Q4 even after the integration of Centra Pulse and Connect?

[Carl-Johan Zetterberg Boudrie]

Christian, and thank you, relevant question. As said, we are working hard on improving the margins, and we've initiated a number of activities to restore and improve our gross margin level. With that said, we should see an improvement in the fourth quarter. But I do not think we will get back maybe to the same level as fourth quarter 2018 already fourth quarter 2019.

[Christian Lee, Analyst]

Okay. And the second question is regarding the U.K. telecare market. You mentioned that Welbeing showed some organic growth there. And how was this growth compared to the overall telecare market in the U.K., could you please elaborate?

[Carl-Johan Zetterberg Boudrie]

Yes. I think overall, what we've seen in both so far in the year, I would say, especially in the second quarter and in the third quarter, it's been quite a slow market in the U.K. We've seen very little tenders in the market. So there's been few new opportunities to capture in general in the U.K. telecare market. So with that said, I think the market has been rather flat in the quarter. We are seeing sort of increased level of activity now. And when we look forward in the pipeline, there are more activities and more tenders that are out, so that we think is likely to come out to the market within the next 1 to 2 quarters.

[Operator]

We are now over the line of Viktor Westman at Redeye.

[Viktor Westman, Analyst]

First one, on the logistics costs affecting the gross margin. If you could say something how large this effect was? And if there's any risk that these costs will come back or lap?

[Carl-Johan Zetterberg Boudrie]

If we start with the first part, the logistics cost in the quarter has been a number of millions higher than what we would see as normally expected. And going forward, we are seeing that we can get to an improved level of logistic cost. So the logistic costs should come down in the fourth quarter. With that said, part of the driver for increased logistic cost is also sort of positive demands from customers and slightly higher demand than anticipated for us as well, combined with new product launches, which have resulted in us taking in products from our manufacturing sites by plane and that drives increased logistic costs instead of taking them by both door or rail.

[Viktor Westman, Analyst]

Okay. Understood. And a question also on the market. I think for -- few years back, you mentioned that you had a 1% penetration outside of the Nordics. So I'm just curious if -- how you see that now? Have you revised the addressable market figure? Or is this still the case you will say?

[Carl-Johan Zetterberg Boudrie]

Let's see -- if I -- so I understand the question correctly, Victor. When you say 1% penetration outside of Nordics in relation to what?

[Viktor Westman, Analyst]

The phones, senior phones.

[Carl-Johan Zetterberg Boudrie]

So in total number of seniors, you mean the penetration we had in relation to total number of seniors or...

[Viktor Westman, Analyst]

Yes. Yes, the addressable market of seniors, is that just like a total number of seniors, do you make any distinction between active seniors or more relevant seniors?

[Carl-Johan Zetterberg Boudrie]

Okay. I think as we communicated before, we do look into seniors in terms of different stages of life rather than maybe age. Having that said, and especially where we are, I think the mobile phone market now, we are focusing our efforts to our key markets in Europe, being the Nordics, DACH region, U.K. and -- travel to a large extent. Looking at those markets, if we take senior mobile phone markets in those regions, we see that we are the market leader in all those regions with the highest market share. And also, in many regions, our market share are in very high double digits, so from 50% and up.

[Operator]

Before going to the next, which is Simon Granath at ABG. [Operator Instructions]

[Simon Granath, Research Analyst]

We have already touched upon the gross margins, but could you give us some color on the current gross margin in services Sweden? Is it similar to earlier levels? And also, what's the gross margin relating to the new agreements that you mentioned in the report? Are you relating these to new tenders on the market? Or have you actually signed these new agreements?

[Carl-Johan Zetterberg Boudrie]

Simon, and thank you for your questions. One, if we take gross margins, I'd say, in Sweden, we are seeing that we are keeping our gross margins in Sweden at previous level. And I assume your questions regarding tenders was relating to Sweden as well. And saying that we won a number of tenders in the quarter are relating to tenders that we have won during the quarter.

[Simon Granath, Research Analyst]

Okay. And how is the gross margin on those new tenders?

[Carl-Johan Zetterberg Boudrie]

I would -- we see -- in Sweden, we see a similar gross margin as we've done in the past.

[Simon Granath, Research Analyst]

Okay. Perfect. And how is the seasonality pattern for Centra Pulse, does it variate to the group as a whole? Or -- and what can we expect in terms of synergies from this acquisition?

[Carl-Johan Zetterberg Boudrie]

So one, if we take seasonality and I think as we said, in general, for our services business, there is no clear seasonality throughout the year. If anything, even though we haven't -- I haven't seen a big seasonality in that respect here yet and that could be related to some hardware sales within public care is if local authorities and councils do some year-end shopping to consume their budget. But if we take services that there's no seasonality in the services business that we have today. And then your second question regarding Centra Pulse and Connect, and our own Centra Pulse and Connect, we are seeing that we have relevant synergies that we can take out more from an operations perspective, where we, today, of course, with having sort of 2 operations with Welbeing and Centra Pulse and Connect as it is now, combining those, we will have synergies in areas such as contact centers and field engineering, et cetera. With that said, we do see continued interesting opportunities in the U.K. market, and we want to continue to drive growth in the U.K. So the synergies will be a way of self-financing, further expansion and sort of strengthening our competence in our organization in the U.K. to drive that and capture that market that we think we see in the U.K.

[Operator]

Okay. As that was the final question on today's call, may I please pass it back to you to close.

[Carl-Johan Zetterberg Boudrie]

Thank you, and thank you very much for today's result call for Doro Third Quarter 2019. I thank you all for listening, and I wish you a great Friday and a great weekend when it comes.

[Operator]

Okay. This now concludes today's call. Thank you all very much for attending, and you can now disconnect your lines.