Doro AB

STO:DORO

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Jorgen Nilsson, executive]

Welcome to Doro's Q3 report. This is Isabelle Senges, our CFO. And I'm Jorgen Nilsson, and these are our numbers. We'll start off today, as always, with some key highlights, and we'll zoom in on the third quarter, and then I will conclude with some remarks and open up for Q&A. [Operator Instructions] So moving into the key highlights -- sorry, everybody coming into the room, just be like that. It's been a very busy quarter, which is normally the case in Q3. Normally, we go through a lot of fares, typically e-fan billing. And we also have a lot of marketing and sales preparations for Black Friday and Christmas. This is nothing strange, and we always do it. Of course, this year was exactly the same. But this year, we also managed to launch our new HearingBud products, which we've worked really hard and long on, but super happy and proud to now be able to deliver this product, which we really believe can make a difference for people, especially those who suffer from the minor to light hearing problems and don't want to be stigmatized by a normal hearing aid. Then at the same time, the HearingBud is of course not only helping hearing impaired. But it's also a very stylish product, and it has excellent crystal-clear sound, and works like just any other headphones. And of course, they work with both Doro and non-Doro products. So they look like the normal pair of AirPods. They work like that. You can use them with your TV, you can use them with your phone. And then on top of that, it's also a hearing aid. I'll tell you a little bit more about it later. All of those units have not really reached our customers. We have sent out some test on. And so far, we've been very happy about the positive mega coverage we've had, and also very good feedback from both reviewers and customers. So to further help our commercial launch, we've also developed a hearing simulator, which we put on our website. So deaf people or users can actually go in and experience what it's like to have them, although it's of course, not the same thing as having the real one. I'd also like to say that when you start up the HearingBud the first time, you have to conduct a hearing test, whereby you actually set up these HearingBuds exactly for your hearing capabilities. And then there are also 100% ambidextrous. So you can put the left one in your right ear and the right one in the left ear, and they will automatically switch to the right one. So I'm really proud of that and really looking forward to it. Other than that, in this quarter, we also opened our first pop-up store. And the pop-up store is basically a purpose-built store that we opened at one of Scandinavia's biggest malls in Malmo. And for us, this is an excellent meeting place for our staff to meet directly. We've seen them from their relatives, so we can try and learn more about their potential pressures on patents. Then of course, to add to that, it's also been a boost for our brand awareness and help us promote our products. So very positive to see the feedback, and this is definitely something we will consider for more places in other regions. And then finally, also during the quarter, we launched our forthcoming Doro Belt product, which we released officially in Barcelona. And the second major thing is that the 4G transition continues. We've spoken to you guys about it before. And now we see that not only is it in the Nordic, but also in France and U.K., the transition has really picked up. Both France and U.K. is not running at high speed towards 4G in the same way Sweden did before. And we are very happy because we've managed this transition from 2G in a great way. We had some concerns with regards to inventory, et cetera, but we do not foresee that we will have one single 2G product sitting in our warehouses when the migration is over. To add to that, our 4G range have been very well received and some of the current ones are really best sellers to our customers in both France and Sweden. And they also generate a very nice margin for us, which we're of course super happy about. Finally, on the 4G, we can also say that in this quarter, we launched before time, by the way, our latest range of 4G new phones, and these are maybe even better positioned to cater for the 2G migration that is still left. And if you look at a country like France, we still estimate that there's some 1 million active 2G subscribers left, only in France. So we still think there is a nice chunk of customers that we can migrate. Not only have we been active and have seen very good transition results from 4G, but we also have had a very robust quarter when it comes to the financial costs. We've grown our market share despite mainly all the other markets declining. We've increased our sales, we obtained our profits and also our cash flow. And once again, all this despite the regional markets for both future and smartphone are declining compared to last year. So we also once again enjoyed a very solid margin this time. Once again, thanks to favorable portfolio mix where 4G really picks up over 2G. We've managed to keep our freight costs down very much because we also delivered our new 4G range ahead of time, so we didn't have to put anything on flight, we could put it on boats. And then once again, we also enjoyed a very positive forex effect. In addition, we managed to keep our operational costs in line with our plan. So our EBIT came in at almost SEK 39 million this quarter. And the EBIT margin then came in at 14% compared to 11% in the same quarter last year. Those are the key highlights. I mean, we're super proud to be able to report this. But we're still a little bit more on the details, and I think some of this will be a bit repetitious, but as I said, we reached a net sales of almost SEK 273 million, so up by some 13% compared to last year. But once again, this is -- although there's still a decline overall in both feature and smartphones in the markets. Overall, we saw a very good momentum in three out of our four regions and across all the sales channels. Last year, we had a sales during the summer months, but this year, we maintained a very strong performance and we even saw additional late quarter push at the end of Q3, which will, of course, helped deliver the sales growth in the quarter. As I just alluded to, the success of our 4G phones really contributes to our sales growth now. And it's very nice for us to see how well the 4G investments are paying off. I would say that we already today have a great 4G portfolio. And as I mentioned, some of these products have really become best sellers of some of the customers. But now the new range that we launched are probably even better positioned, especially if you want to take a further step at the remaining 2G customers. Also, once again, we'd like to reiterate just the fact that we were able to release this 4G range ahead of time, contributed, of course, positively net sales, but also that's a very positive effect on transportation costs. So in short, we can say that we have a 4G feature phone, we sell less number of phones. That's true, but then we sell them at a higher price than with a better margin. So by selling more 4G and also increasingly selling more smartphone, we grow our share of higher value products, which has a positive effect on our turnover. So the volumes go down, but we sell more of the high-value products. Then also, I just want to say a final word about 2G, 4G. It's not like we walked away completely from 2G. We are still very much present and active in the 2G category, but only in the regions and countries where 2G remains strong and especially this is in Germany. So we will maintain both. But for the three other regions, it's pretty much 4G going forward. As just said, it's also very nice to see that there are positive trends in the smartphone sales market that continues. And I think that's very much thanks to the success of our label store 2 series. That's been very good. Speaking of the regions. We can quickly see that three of our four regions performed very well. Our DACH region is still played definitely by the times of the integration, the transformation that we're doing in order to convert DACH to full fire daughter company like all the other regions. That said, it's important to remember that the main drop in Germany is actually only with what we call nonstrategic products, i.e., those are box shifting products, so to say. So they are non-Doro branded, and they only have a lower margin. And this is according to plan as we are transforming the region. When it comes to our other range in DACH, there sales is down also, but that's only by 6%. And here, the majority of this quarter was actually attributable to the slow performance of our web sales because we changed our setup on Amazon from a so-called Seller Central to a marketplace. So a Seller Central is basically where Amazon takes care of the whole thing and they just buy from us and they can set the prices and they can own the customer and arrange for the business. Now we've implemented a marketplace. So basically, we use Amazon in Germany as a portal in the same way we do successfully in the other regions. On the, should we call it, sun light side, we have Nordics, which have made an impressive jump by almost 50%. So that's really great. Then again, we of course, have to remember that Q3 last year was abysmal. We saw many of our customers consolidating their Nordic warehouses, and they didn't restock at all. But this year, however, demand has remained good. And once again, especially thanks to the transition to 4G. Also our B2B customers in the Nordics, especially the major mobile and fixed line operators are placing some very nice orders as they're replaced in their fixed platform.U. K. and Ireland had another positive quarter. They were up by almost 16%. So it seems that the good momentum that we have in Q2 is now also being enjoyed in Q3 and hopefully for the rest of the year. Here in the U.K., we also increased our spending, marketing activities like radio, online, social media and et cetera. And of course, it has resulted in more sales, but also much more traffic to our local doro.co.uk website as well as the Doro Amazon website. Also now in the U.K., we see a very positive trend in terms of 4G. And we're particularly happy that our largest retail customer has now migrated from their 3G to 4G, and that's been working out very well. Finally, looking at Western and South Europe and Africa, up by 10% and 11%. Here, the transition to 4G has also really accelerated. And I would always say, it almost came as a surprise to us how fast it kicked off because the operators were talking about 2025 or later. But now we see it's really accelerating across all distribution channels. As I mentioned before, we estimate there are still some 1 million 2G customers active only in France. So we will naturally try on this to capture those as well. Otherwise, in the French or in the Southwestern Europe region, the retail sector has demonstrated quite a strong resurgence compared to last year. And also there, we see a good trend in terms of smartphones picking up very good. With that, I think it's time for us to have a look at the cash flow financial position.

[Isabelle Senges, executive]

Yes, thank you. Let's go again through the quarter with some figures. So the net sales landed at SEK 272.7 million, 13.1% increase compared to same quarter last year. While a part of the sales increase is attributable to currency, we do show a good growth in three of our regions, as Jorgen mentioned. Gross margin was 43.4% in the quarter compared to 37.7% same quarter last year. The main improvement year-on-year is again the gross margin on products and the second-best improvement is inbound rate. We can also mention good inventory management. This has helped us decrease the inventory now for several months in a row, and it also helps by keeping down the costs linked to stop of [ excess ], which helps the margin. The only item of the margin increasing in proportion of sales is the cost for licenses or royalties, which we had anticipated as it is linked to the increase of sales of 4G and smartphones categories, which have higher license costs than 2G. The EBITDA for the second quarter was SEK 48.4 million compared to SEK 37.7 million last year. The EBIT landed at SEK 38.9 million compared to SEK 26.9 million last year, and the EBIT is in percentage of sales at 14.3% versus 11.2% last year. Our operational costs have increased the way we planned with the many sales and marketing activities of the quarter. However, the high sales and the stock margin could cover for the costs that is leaving us with a comfortable result for the quarter. The profit after tax ended up at SEK 22 million compared to SEK 16.6 million last year, giving earnings per share of SEK 0.90 compared to SEK 0.68 last year. Yes, if we go to the cash flow. The cash flow from operating activity was very high this quarter at SEK 73.1 million compared to minus SEK 4.4 million last year. The improvement was driven by a high EBIT and the low working capital. The lower working capital is mostly due to lower inventory levels and higher accounts payable. Investments for the quarter were SEK 7.3 million versus SEK 13.8 million last year. And the free cash flow for the quarter ended up at SEK 65.8 million compared to minus SEK 18.2 million last year. On the liquidity side, we had a bank balance at the end of the quarter of SEK 167.4 million compared to SEK 117.4 million last year. During the quarter, we have lowered further the utilization of our bank loan, that are now down at SEK 20 million. The equity ratio is 55.9%, was 47.7% end of Q3 last year. We finished the quarter in a net cash position of SEK 135.3 million, which is an increase compared to the previous quarter, where the net cash position was SEK 74.9 million. It's also an increase compared to same quarter last year when we had a net cash position of SEK 27.2 million. This was my last number.

[Jorgen Nilsson, executive]

Okay. So if we try to wrap it up before we open up for Q&A. Obviously, it's been a fantastic quarter. We're really happy. I said now a couple of times that it's been tough for both feature and smartphones. Overall, we see that everybody is struggling. At the same time, we've managed to grow our market shares. We grew in our sales. We've been able to remain with high margin. We haven't spent more OpEx than we had planned. So we can really say that we generated a robust operating profit, and we are super happy about that. At the same time, you have to remember that we also invest in new product development and some of that is not CapEx yet because it's not activated. Therefore, it doesn't show up as traditional investment. But we are investing in both people and new products. Once again, the new products, the HearingBuds, super happy that we've now launched them, waiting for the first units to come into stock. We have customers waiting for them. We're really going to look forward to that. Also happy to see that so many including our chairman, is using them today as his own earphones. I think that's a testament to how very good they are also for people who don't have a hearing impairment. Then can I say again that we launched the Doro Pop-up Store. And one thing I forgot to tell you by the way, before was that our Pop-up Store is also populated by a senior staff. So we also have senior staff when we employed now since we opened the Pop-up Store. So that will make it even easier for seniors who are a bit reluctant maybe to ask for technology center, they can go to the Doro Store and find out what it's like to work with different kinds of technology together with somebody who's in their own age group. So if you have the possibility, come to the imported [ store ] at the moment you pass by. It's really, really nice. 4G transition, I've talked about it a lot, but of course, it continues to be very positive for us. And several of our 4G products are really bestsellers with a strong margin. So I think we've handled that 2G to 4G transition in a very, very good way. And of course, also, probably just saying, we have a free cash flow, which reflected a strong EBIT and also the positive development of the working capital. It's not only in sunshine, of course, there are also some challenges. I would say that there is still continued economic consumer worry, maybe especially in a stagnating Germany. We all think that the big engine of Europe's economy has a tougher time. And that, of course, puts a further strain on our German business transformation. But we have to be able to conclude that business transformation by end of this year or early next year and after that to have a full base sales region in Germany like in the other regions. Then the sales numbers are, when it comes to the non-selling product, what we call the innovation products, so let's say, the tablets and the watches are still not where we want them to be. We're quite disappointed. So we just have to continue investing in more sales and marketing activities relating to that. But fortunately, as said, the 4G and the phones are doing very well. And there are lots of other things that happen recurringly. And one thing, of course, is the new EU Ecodesign Directive, which is being implemented. We think it's a really good directive, but of course, there's a major impact on us as well as the entire industry. When it comes to, for example, durability, energy efficiency, recyclability, et cetera. So in a short miss, you basically need to be able to replace every part of a telephone, and we need to keep spare parts of that. And thinking of our target group, it's hard maybe to foresee an 8-year-old coming in and saying, I'd like to by a speaker or a receiver for my feature phone and replace it. But that's one of the implications of it. So priorities ahead finally. One, we would like to now successfully sell out the HearingBuds as well. We've done good sell-in. We have to deliver the DoorBell. I'm not worried about that because it's basically ready. And then, of course, continue the implementation of our coming-in future products and the road map to diversify ourselves. Then, we would like to continue our very good momentum in 4G on feature phones in general because we need that sales to continue to be stable. So we can fund expansion into other parts or areas. And then also once again, we really would like to be able to finalize our streamlining of the DACH business because as you saw, three regions out of four, are really performing and the German region has a lot of potential, which we feel we can deliver on. I think that's pretty much a summary for the quarter. Once again, super happy. Very, very strong. We're proud of the ground work that we've been able to do. I think we can get the camera in again here. There we go. We should be able to open up for you guys to have questions. And then please just remember to unmute your microphones before you start talking to us for the work. I think Patrice, you are there now to let everybody be open. So please fire away. I think there's one there from Fredrik. I can't really say the full name, but please Patrice, will you help them.

[Fredrik Reuterhall, analyst]

This is Fredrik Reuterhall from Redeye. Congratulations to a very solid report. First of all, why do you think the pace in the exploration behind the phase up to 4G phones especially in the Nordics and West Europe now happens this quarter. I mean, it's been ongoing, but it really, really looks like it's been boosted heavily. And then my next question is, how long do you think this will continue and at what pace?

[Jorgen Nilsson, executive]

So when it comes to the Nordic, I wouldn't say it has increased No. It's been a very good pace all the time. The Nordic Copra, especially in Norway, they started off very, very early. So the Nordic factories are way ahead of rest of Europe. When you take France, for example, there, they were all talking about it. Most of our customers start communicating. We will switch off by this end of the year. Now all of a sudden, they start really putting some pressure behind it. And obviously, this is our financially viable or financially understandable for them, too, because today, they maintain 2G network, 3G network, 4G networks, and the 5G network. They would like to reharvest all of that bandwidth. They don't really want to spend money in it. At the same time, when it comes to 2G, many of these machine to machine, let's say, the vendor machine for Coca-Cola or a parking machines, et cetera. They've been on 2G. So I think we are big parts of the operation, been reluctant to switch off 2G. But at the same time, the network guys, they don't really want to maintain it. And maybe the network guy is now finally won the internal discussion. But also with the transition to 5G, they need the bandwidth. And then maybe finally, I would say that if one or two of the big operators start doing it, then maybe the others follow Sweden and say, okay, our worst competitor is now switching off, then we'll do the same. Then how long will it continue? Yes, how long is a piece of string. We check now, we think there's at least 1 million 3G subscribers still active only in France. We have a super good cooperation here we're the biggest operator in France where we have a migration package is different for them. So I think definitely, we'll see migration for the coming six months, but I shouldn't be making this forward estimations.

[Fredrik Reuterhall, analyst]

How large part would you say is left until the full replacement is done? I mean can you give us a presented number or?

[Jorgen Nilsson, executive]

You mean in Europe. That is really hard to say. But as I said, I mean, when we sat with the biggest operator in the U.K., I think they talked about them having like 0.5 million subscribers, only them on 2G still. The selling ranges differently from operator to operator. I also think, when they say an active subscriber, most of the plans, those active 2G subscribers are seniors. And they basically just use their phone for making or receiving phone calls. So they don't really generate any revenue for the mobile operators because they maybe make them receive some 10 calls a month or something. At the same time, especially ex incumbent, let's say, BT, Franciscan, it cannot afford politically, so to say, to just disconnect them. They have a moral as well as political responsibility to migrate them. But how big those are, I think it's probably a well-kept secret within. We can see if we can dig up a little bit more information about it.

[Isabelle Senges, executive]

It's also different from country to country because in Germany, there must be a much bigger part of 2G still there.

[Jorgen Nilsson, executive]

I would say all of Germany. In theory is still 2G. There we see a much -- I mean, it's a very good point. But if we think we complete the 2G migration, let's say, next year in the Nordic and France, but I think it's going to take longer. Then there's all of Germany, too. They basically have not migrated their feature phone customers at all.

[Fredrik Reuterhall, analyst]

Yes, interesting. I have two more questions, and I'm going to step back in line. Historically, the Q4 is a very strong quarter for you. And with the new HearingBuds, I guess, and the strong momentum that we saw, we should expect this to be the case this year as well, right?

[Jorgen Nilsson, executive]

Well, we shouldn't make forward statements. But I would say, traditionally, you're right, Q4 used to always be the strongest. But I would say the last couple of years, Q3 has got more and more as a strong quarter. And that's probably because Christmas sales have moved earlier, especially with regards to Black Friday. So maybe not so much in the Nordic, but in the big countries in Europe. If you want to sell for Christmas, that could probably have to be ready in our customers' warehouses by September, maybe the first weeks of October. So now with Black Friday, that's moved even earlier. So a lot of what we would call Christmas and Black Friday sales happens for us in Q3. So hard to say. I can't remember now, maybe you can check. I think the last couple of years, we've seen that Q3 is becoming stronger and stronger at the expense of Q4.

[Isabelle Senges, executive]

It's stronger than Q4. Q4 should still be.

[Jorgen Nilsson, executive]

Yes, it should definitely fill the roles. But it evens out between the two.

[Fredrik Reuterhall, analyst]

And finally, on the HearingBuds. You talked about product launch, but can we expect this to be in store before Christmas or?

[Jorgen Nilsson, executive]

Yes. That is the plan. They are on the boat, so to say. But that should be able to. Patrice, then you can check if there are other people. We can't see if there's somebody raising their hand for questions. Looks fine. If there is anyone, please make sure to speak up. Seems everybody's happy with the quarter report. And we thank you for your attention. Thank you for attending. And we'll see you again in February. Have a nice weekend, everyone.

[Isabelle Senges, executive]

Thank you. Goodbye. Bye.