Doro AB

STO:DORO

Earnings Call Transcript 2020-Q3

[Operator]

Hello, and welcome to the Doro AB Q3 2020 results. [Operator Instructions] 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 I hope that all of you can hear me loud and clear. With me today, I also have our CFO, Linda Nilsson. So thank you, everyone, for joining. I hope you've had a good Friday morning.We can take the next slide, please. And today, we will cover the highlights from the quarter, give you some more specifics on sales, profitability and financials for the third quarter 2020. And then finish with concluding remarks and, as said, the question-and-answer session in the end.We can take 2 slides forward, please, and look into the key highlights of the quarter. The third quarter was an eventful third quarter for Doro. We took several important steps in our strategy execution in Doro Care. The acquisition of Victrix strengthened our technology platform and technical capabilities, increasing our possibility for innovative offerings in the future.We also launched our new welfare hub, Doro Eliza. And in addition, we improved and strengthened our presence in the U.K. market with the acquisition of Eldercare. Early in the quarter, we also announced and have started to implement a restructuring program for the group where we have already implemented approximately 40% of the announced savings in the quarter.Overall, a good cost control resulted in operating margin of 7.2%, excluding restructuring costs. This in combination with a good cash flow, which both of them was ahead of last year.If we move into the third quarter more specifically, and we can move 2 slides ahead into business area Doro Care and business highlights for the third quarter. As already mentioned, we took many steps forward in strengthening our leadership in technology-enabled care in the quarter. With the acquisition of Victrix and the launch of Doro Eliza that I just mentioned, and Doro Eliza awarded with the iF Design Award earlier in the year, we have created a strong foundation for new leading solutions and services in technology-enabled care.We also further expanded and strengthened our position in the U.K. market. The acquisition of Eldercare in the period and Connexus Careline that we acquired early in the fourth quarter have established us as a market leader in the United Kingdom. Our efforts to increase productivity and efficiency have continued in the quarter. We are seeing effects from the work done, and we are now starting to integrate Eldercare and Connexus Careline to extract synergies also from these acquisitions.Finally, on business highlights for Care and something not fully related to the quarter, but I suspect that many of you have probably heard about the challenges that's been reported in the media on social alarms and alarm handling in Sweden. And I just want to, for clarity, point out that our social alarms and our alarm handling have continued to work very well in the last few weeks, just as before. And our focus is to continue to provide leading service for our customers and seniors. So the news that you might have seen in Sweden and the problems that's been reported are not related to Doro.Next slide, please. And a little bit more on sales and financials in the third quarter for business area Doro Care. Sales in Doro Care increased with 4.3% in the quarter. This despite being negatively impacted by currency effects of approximately 4 percentage points in the quarter. But even adjusted for currency development, we are not satisfied with the growth within Doro Care. And this is something we are focusing heavily on to make sure that we address and improve in the coming quarters. The main reason for the unsatisfactory sales growth is a few lost contracts early in the year and low product sales in the quarter in most regions.And as I mentioned, we are now focusing heavily on improving our organic growth in a number of activities that we are -- that we have implemented that we are implementing to ensure that this happens. We have, in the quarter, strengthened our sales organization as one key element of the activities that we are implementing. And we have recruited a number of strong team members in both Sweden and U.K. in the sales organization.The operating profit for Doro Care equaled SEK 9.7 million in the quarter and operating margin of 7.8%, both an improvement from previous year. Number of connections totaled 348,000 at the end of the third quarter, which is up from 304,000 the same period last year, and increase is driven by the addition of Eldercare from the acquisition earlier in the quarter.Next slide, please, and some more highlights or information regarding development in the different markets in Doro Care. Sales in the Nordics in Doro Care was very weak in the quarter. Lost contracts early in the year, especially in Norway, and a continued slow tender activity throughout the quarter, albeit we did see some increase towards the end of the quarter in especially Sweden, have impacted it negatively. Also product sales, again, especially in Norway, was low compared to last year, but we do believe that the launch of Doro Eliza will gradually improve product sales.Sales in the U.K. and Ireland increased with 39% mainly driven by the acquisition of Eldercare, which added 45,000 connections in the quarter. Sales in other markets, which is predominantly product sales, was below last year with a total revenue of SEK 6 million.Next slide, please, and then we turn our focus to business area Doro Phones. Overall, sales in business area Doro Phones is still negatively affected by COVID-19 and the recovery from the first wave in the spring. As we now unfortunately are seeing a second wave of the pandemic in Europe, the market situation is uncertain in the coming quarters. But we have shown in both the second quarter and in the third quarter that we have managed to navigate through the uncertain times of the pandemic in a good way. So given what will happen going forward, I think we are properly suited to handle this in a good and proactive way.But overall in the quarter, sales still recovered from the second quarter, and especially, we saw a good recovery in traditional retail and in certain markets, which I will come back to a little bit later. Online sales overall also continued to develop positively in the quarter.During the quarter, we have also launched a number of new products, updating and improving our portfolio. The new products are new feature phones to our portfolio, replacing some of the products that we have. One is first, I would say, the Doro 7080 being a new 4G feature phone plan; the Doro 7080X (sic) [ Doro 780X ], which is a key Doro product, simplified bar feature phone; and then Doro 730X, a ruggedized bar feature phone; and the Doro 7000H.Next slide, please, and we'll look into sales and financials for Doro Phones. Sales in business area Doro Phones declined in total with 21% in the quarter. Also sales in phones slightly negatively impacted by currency effects. Otherwise, the main factor for the sales drop is a slow recovery from COVID-19 in certain markets and also a few effects from the restructuring activities that we've taken.In some markets and certain products, we have seen a very strong recovery in the third quarter compared to the second quarter, even stronger and quicker than we anticipated, while we, in certain cases, have not been able to fully meet the demand from our customers in the quarter, which have had some negative impact. Our new product launches that I mentioned on the previous slide have received a positive feedback from the market so far, and we have seen some additional sales in the quarter, especially to operators, from our new product launches.Financially, good cost control and operational management resulted in the gross margin and operating margin in line with last year, and operating profit was SEK 23.1 million in the quarter. I think especially strong is to maintain the operating margin in line with last year despite, of course, the significant sales drop in the quarter.Looking at next slide and sales per market in Doro Phones. In Nordics, we did see a clear decline of 22% in the quarter with low consumer activity following COVID-19. But we have, despite the sales drop, maintained our clear market leadership in the quarter and maintained our market shares in Nordic market.In West and South Europe and Africa, we saw a strong recovery in the quarter, especially in France and feature phones, resulting in a sales increase of 7% compared to the same quarter last year. As a result of the strong recovery and great work in the region, we manifested our market leadership in the key countries in this market.U.K. and Ireland saw a strong recovery in retail after a very weak second quarter, which resulted in a growth of 9% compared to last year.Central and Eastern Europe is a region in Europe where we have suffered the slowest recovery from the second quarter of COVID-19 with key challenges in retail and especially for us in the German market. This, in combination with the absence of Europe's largest consumer electronics trade show, IFA, impacted the quarter negatively.In North America, we also saw a clear decline in the market, which is a result of a conscious decision in line with our restructuring activities to phase out the North American market going forward.Next slide, please. As we communicated in the beginning of the quarter, we have reorganized our business into 2 separate business areas, Doro Care and Doro Phones, in order to increase focus, speed and flexibility. We also communicated that we are restructuring our business with the ambition to reduce our operating expenses with SEK 110 million to SEK 130 million compared to 2019. And the majority of this restructuring will happen and will affect business area Doro Phones. And as a result of the restructuring in business area Doro Phones, we will focus on our key markets, our key products and our key customers.And as you saw, we have already started to implement a number of activities in line with the restructuring, and we have implemented approximately 40% or equal to SEK 50 million of the planned savings, and this had resulted in restructuring costs in the quarter of approximately SEK 7 million.And as said, focusing on key markets, products and customers have resulted in us taking a decision to phase out the North American market, this being a low-profit market for us, and also to close local operations in South Europe. We remain confident that we will reach our planned savings, and there are a number of activities ongoing to continue with the restructuring program with a number of ongoing negotiations. And we are confident that we will reach what we have communicated in operating expenses savings.Okay. Next slide, please, and to look into profitability for the group in the third quarter. Sales for the group totaled SEK 443 million in the quarter, which is a decline of 15% compared to last year. Currency adjusted, the decline was 12%. The gradual recovery from COVID-19 and the planned phaseout of the North American market are the key explanations for the decline.Gross margin and operating margin, excluding restructuring costs, increased compared to last year. The effects from our savings initiatives have paid off in the quarter, while we managed to reach an EBITDA of SEK 53.2 million and an EBIT of SEK 31.7 million, excluding restructuring costs, despite the lower sales levels that we experienced in the quarter.Next slide, please. Cash flow. Also, cash flow in the quarter was above last year. And we saw a strong cash flow -- free cash flow of SEK 145 million in the quarter. The cash flow is mainly driven by a very strong positive change in working capital, of which some of that improvement in working capital, you could say, is a little bit boosted in the third quarter as we have negotiated longer payment terms with certain suppliers during the COVID-19 situation in the spring and also low inventory levels.But all in all, the positive cash flow resulted that we now, as a group, have a net cash position of SEK 6 million, including IFRS 16, compared to a net debt of SEK 142 million the same period last year. So in total, I would say, from a financial perspective, Doro Group is very well prepared to continue to invest and drive our strategic ambitions and transformation forward.Okay. Jumping 2 slides ahead, giving you some concluding remarks before we move into a question-and-answer session. The positive elements from the third quarter is, of course, that we've taken several steps in executing our strategy, both within Doro Phones and Doro Care. We've strengthened our technical capabilities in order to be able to offer more proactive and preventive solutions within technology-enabled care in the future. We also strengthened and expanded our position in the U.K. market. In combination with the acquisition of Connexus Careline in the fourth quarter, we now have a market-leading position in the United Kingdom.We have delivered a good cash flow and a solid operating margin, excluding restructuring costs, in a quarter that's been affected by the pandemic. And we have also reorganized the organization to increase focus and efficiency, and in a good way, started the restructuring of our business.The challenges in the quarter, of course, and as I mentioned before, one of our key challenges in the quarter that we need to focus on going forward is the growth in Doro Care, which is not in line with our ambitions and our plans. Having that said, the market within Doro Care has continued to be a little bit slower than normal with postponed public procurements in all of our markets. And also, sales within business area Doro Phones have been negatively affected by the pandemic, and we did see a clear decline in sales in the third quarter within Doro Phones.So that leads us to priorities ahead. And as I mentioned before, we are unfortunately experiencing what we can call a second wave of the pandemic in Europe. And as a result, we are, of course, continuing to focus and prioritize the safety and well-being of our employees and our customers and, of course, the seniors going forward.We will and we have implemented several measures to improve the development within business area Doro Care and especially the sales growth development. And we continue to restructure Doro Phones in line with the restructuring ambitions that we have communicated to reduce operating expenses and then focusing on our key markets and key products.But all in all, I would say, and as I started with, it's been an eventful quarter for Doro. A lot of things have happened. We've seen some challenges from the sales perspective. But given that situation, we still manage to deliver a good operating profit, excluding restructuring costs, compared to last year and a good cash flow, giving us a good position to drive the transformation -- to continue to drive the transformation and to become a market -- European market leader in technology-enabled care.Thank you very much for listening in, and we now open up for a question-and-answer session.

[Operator]

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

[Simon Granath, Technical Analyst]

I know -- firstly, I know it's a tricky question, but you mentioned that you have seen a very strong demand -- recovery in demand in some markets. How should we think around this as we go into Q4? Could further pent-up demand continue to entail sequential improvements? Or is the situation with COVID simply too uncertain?

[Carl-Johan Zetterberg Boudrie]

Thank you for a good question and probably the million-dollar question for every company right now. Now as you alluded to a little bit, the current situation with the pandemic and where that will lead us makes the outlook quite uncertain in the future. So I think it's difficult to give any good predictions of what will happen going forward.

[Simon Granath, Technical Analyst]

Okay. That's fair enough. Going forward, how should we think around this phone sales mix on the back of your restructuring program? Could your decision to close down operations in some of your markets affect its gross margins? Or what could happen as we look forward here?

[Carl-Johan Zetterberg Boudrie]

As we said and what we are focusing more on is to ensure that we focus and that we stay in a market where we have a market-leading position, which typically then also is in line where we have better profitability than in some of the other markets. So all in all, there could be some positive mix effects from that restructuring.

[Operator]

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

[Viktor Westman, Analyst]

Congrats on some solid figures. I got a question on the closedown of Spain and Italy. Can you say approximately how large these markets were in 2019? Or any other number around those markets?

[Carl-Johan Zetterberg Boudrie]

So we are closing down local operations in Italy and Spain. That doesn't mean that we necessarily will exit the markets 100% as some of the customers in those markets are operators also present in other markets where we have more of a European relationship with those customers. So sales will hopefully not disappear completely from those 2 markets. But otherwise, from a sales figure point of view, back to your question, Viktor, in Doro Phones, I'm just trying to do the math, so sorry to be too slow. But I would say sales-wise, those markets accounts for, say, 2% to 3% of sales in Doro Phones.

[Viktor Westman, Analyst]

Okay. Good. And the issues for your competitor in telecare, are those affecting the ongoing new procurement?

[Carl-Johan Zetterberg Boudrie]

It is, if we take from a Swedish perspective in the sense that SKR, and as I know you are aware of, they did issue a new tender for the full alarm chain and alarm handling before the summer. That tender was -- decision on that tender we received a few weeks ago. But given the current situation, SKR have decided to postpone any signing of that agreement until they have understood the situation better.

[Operator]

[Operator Instructions] And as there are no further questions, I'll hand it back to the speaker for closing remarks.

[Carl-Johan Zetterberg Boudrie]

Thank you very much for listening in. As I concluded before the Q&A session, it's been an eventful quarter for Doro. We've managed to deliver good cash flow and a solid operating margin, excluding the restructuring costs. And we've taken several steps in driving our strategy and transformation towards a European leader in technology-enabled care and continue to restructure our business within Doro Phones. So I look forward to the coming quarters. I wish you a good Friday and a good weekend when that comes, and thank you very much for today.

[Operator]

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