Doro AB

STO:DORO

Earnings Call Transcript 2024-Q3

[Julian Read, executive]

Okay. So good morning, everybody, and welcome to Doro's Presentation of its Q3 Interim Report. We have an agenda this morning that looks a bit -- I'll show you that in a second actually. So obviously, the normal disclaimer around our forward-looking statements. Give you a second to quickly read that before we move on. Okay, nothing unusual there.

So the agenda for today, we'll talk you through, as usual, our key highlights. We'll then dig a little bit deeper into the third quarter specifically. And then we'll end with some -- an open mic session with questions and answers. If everybody could be on mute for now and then when we get to the Q&A session, you'll have to obviously come off mute so that we can actually have the calls -- have the questions.

Okay. So let's talk first about the key highlights for the quarter. So firstly, Q3 was a challenging quarter in terms of top line sales. That's not coming entirely as a surprise to us because we're always going to be in the position where we'd be selling through stock in trade ahead of launching a new range of feature phone products in Q4. We also had an effect, as you may remember back when we presented Q2 that some of our customers in France have pulled forward the orders from the first half of July into June in anticipation of increased fees associated with the WEEE criteria, which is fees paid on for ahead of recycling of electrical components. So we always knew that we were having some headwind walking or going into this quarter. And on top of that, there were some exceptionable -- exceptional sales one-offs in Q3 of last year, which made Q3 last year extraordinarily strong.

So we knew we were heading into a tough quarter quarter-on-quarter. Now when you actually look or dig behind the numbers and you look a bit deeper, what we actually see is that a much better picture. We've actually increased market share in Q3 versus where we ended Q2 according to the sellout data that we used to track sellout via GfK. We continue, therefore, to outperform the market when it comes to feature phones. As I say, we're growing share in our markets. And we've also started now shipping the new Leva range of products, and we're in the final stages of planning for a media campaign to support this launch.

Beyond top line sales, as you will see, we actually have -- the business is in -- and I think I mentioned this last time on my first call, beyond the top line sales, the business is really quite robust. We continue to perform well when it comes to margins. And as you'll see, we have over 50% margin for the quarter. Now while that is boosted by some one-off events, there continues to be a structural improvement in the margins that -- and a structural improvement. So this isn't something that's just going to disappear. This will continue to be something that the business is capable of delivering on. Now where is that coming from? It's coming from, again, year-on-year, we see a continued strong performance of our 4G products versus 2G. That's not something that we feel is going to go away, especially as 2Gs will be turned off over the coming years market by market, obviously, the timing is slightly different.

And we're also seeing a continued growth and strong growth in our D2C business. So we see some very strong performance that structurally is going to improve or maintain and improve our margins for the long-term. As mentioned, there are a number of one-off margin improvements as well, which are associated with the release of provisions for royalties. And again, in relation to overall operationally, how strongly the team are controlling operating expenses, inventory, which has been depreciated through the sellout of old stocks. So we're in a very healthy position when it comes to the operations of the business and the margins that we deliver. So my focus, the focus of the team is now on driving the transformation and sort of a commercial transformation of the business.

That started with a process over my first 3 months where I've engaged with everyone across the business. We've sat down and we've talked an awful lot around where our strategy and what things we may wish to change with that. We've had those discussions and an alignment on the revised strategic direction with the Board, not talking about a major complete change in strategic direction, but a refinement of our strategic direction with the Board. And we've then engaged with a number of strategic partners helping us on consumer insight, brand communications, media planning, and we've kicked off a brand restage project so that we can -- we're preparing ourselves to be able to invest heavily behind building the brand, building the business as we go forward. We've also begun recruitment during Q3 of key commercial roles to strengthen the team.

So if we look a little bit more depth into the third quarter and the performance by the market, you can see that all the markets have had, as I mentioned at the start of the call here, some headwind going into. And where we see the sort of the biggest headwind really is in the Nordics, where sales of SEK 49 million, they were actually up versus where we ended Q3 -- sorry, Q2. So Q3 was stronger than Q2, but it was a drop of 30% versus last year. Now the main driver of this is there was an exceptional quarter this -- in Q3 2023 for our B2B business, where we supplied [ DECT ] phones to replace landlines as operators are closing some fixed line services. This was a one-off event that we took advantage of last year. And in the Nordics, what we see, as I mentioned about the increase in market share in the Nordics, despite having significant market share in the Nordics on our feature phones, we managed to still increase our market share by volume by 0.5 points versus the position at the end of June.

In U.K. and Ireland, we see a stronger performance. Here, we see very strong performance of our D2C business, for example, where it's growing fastest. Our net sales of SEK 47 million, that's up nearly SEK 6 million versus the previous quarter, but it's still a decrease year-on-year of almost 7%. So here, we see that the market share on volume has actually increased almost 1 point versus where we were at the end of June. So again, we're managing to grow the business relative to where the market is. So it's not that there's definitely sort of a retained relevance of the Doro brand and Doro's products in the market.

If we turn our eyes towards the West and Southern Europe, mainly as sort of our business in France is the biggest part of this. The net sales were SEK 86 million, which is almost the same as what we delivered in Q2. And remember, in Q2, we had orders pulled forward from the first half of July, which obviously strengthened Q2 a little and softened Q3. And then here, we probably see the biggest effect from the launch of our Leva range being in Q4 versus the launch of the new feature phones last year happening during in Q3. So again, here, the market -- our market share in France is flat versus where we were at the end of June. But if you compare to where we were at the end of Q3 last year, which, as we say, was a very strong year in this region, we're actually up nearly 4 points versus where we were this time last year. So once again, we're performing well in terms of where the market is.

Looking at Central Eastern Europe, looking here really, our German business is a key strategic priority in building and driving that obviously. The opportunity in Germany is significant. So here is a major focus for us to strengthen. And we've had -- we've retained IVS as part of the Doro Group with our restructuring of operations so that we can focus more and more on Doro branded products. Now here, what we see is an increase from -- of almost SEK 5 million -- or over SEK 5 million versus Q2, delivering SEK 35 million. So here, we're starting to build more momentum back into our German business. Although this does remain still a decrease on last year, but last year, there were far more non-Doro products being sold. So what we're seeing is that there's a base here of growth on the core business. And again, the market share in Germany versus the end of Q2 is actually up 0.7 points. So again, we're seeing momentum when it comes to our market share position in the DACH region as well -- or sorry, in Germany. I won't say across the whole region. That's not -- so it's 0.7 points up in Germany.

So that's the sort of the in-depth dive into the different markets, and I'll hand over to Isabelle.

[Isabelle Senges, executive]

Yes. Thank you. So some more numbers. Net sales, as Julian mentioned, [ SEK 217.7 million ]. So that's quite a big decrease versus quarter 3 last year. We could also add perhaps that the transition to the new category this year has been a bit more difficult than last year when we shift from 2G to 4G because we have this hard stop of the deadline end of December with the new directive for the USB-C. So we were really careful in not having a high inventory of product that will not be compliant. Therefore, it was -- transition was a bit more complex to handle.

If we look at the gross margin however, this has improved a lot from 43.4% to 50.3%. Like the previous quarters, the portfolio mix continued to be favorable. But we had some one-offs that Julian mentioned. However, I also want to point out that this good margin has been a steady trend for the last quarters, and it's the result of continuous effort to optimize the supply chain, to keep the inventory low, to minimize the return of products and therefore, the warranty costs by working on the quality of the product and challenging the license agreements. Our fixed costs that were more or less comparable to last year, even though we have started investing in the brand. We had quite a significant saving from the IFA Telecom Fair in Berlin, where we had some presence this year, too, but we managed it in a different way, much more cost effective.

EBITDA landed at SEK 40.5 million compared to SEK 48.4 million last year. The EBIT was SEK 30.3 million compared to SEK 38.9 million. And our EBIT in percentage of sales was at 13.9%. Last year was 14.3%. The profit after tax ended up at SEK 24.2 million compared to SEK 22 million last year, giving earnings per share of SEK 0.99 compared to SEK 0.90.

Next slide to the cash flow. The cash flow from operating activities was SEK 46.8 million compared to SEK 73.8 million (sic) [ SEK 73.1 million ] last year. I think it still is a very good cash flow. It comes from a good EBITDA and an improvement of the working capital, even though this improvement was less dramatic than the same quarter last year. We had a bit more investments this quarter, SEK 9.3 million versus SEK 7.3 million. And the free cash flow for the quarter was SEK 37.5 million compared to SEK 65.8 million last year.

Looking at the cash position. Cash and cash equivalents at the end of the quarter were SEK 215 million compared to SEK 167.4 million last year, and the equity ratio was 58.5% versus 55.9% last year. We finished the quarter in a net cash position of SEK 200.2 million. It's an increase compared to previous quarter, where the net cash position was SEK 163.7 million. And also, it's an increase compared to same quarter last year when we had a net cash position of SEK 135.3 million.

Back to you, Julian.

[Julian Read, executive]

Okay. So that concludes the presentation element. And so if anybody has any questions, we can come off mute and answer any questions that are out there.

[Fredrik Reuterhall, analyst]

Okay. Do you hear me?

[Isabelle Senges, executive]

Yes.

[Julian Read, executive]

Yes. Who do we have talking?

[Fredrik Reuterhall, analyst]

This is Fredrik Reuterhall from Redeye.

[Julian Read, executive]

Yes, Fredrik.

[Fredrik Reuterhall, analyst]

I have a couple of questions. You're talking about the delay of the Leva feature phones. But I mean, you said you were going to make the product available in October, but I just want to make sure that it's going to be with all your partners ahead of Black Week and the Christmas holidays, right, in all regions.

[Julian Read, executive]

So the product should be out with all customers by then. Some of these things are not always in our control. So when, for instance, it comes to operators, operators themselves need to certify our products. So the product is ready. It's being shipped. It's ready to go. We are somewhat reliant on external parties doing their part of the job as well. So all being well and good, yes, it should be out and ready for Black Friday.

[Fredrik Reuterhall, analyst]

Okay. And can you say something about if this is not happening? I mean, how much will it affect your sales?

[Julian Read, executive]

How long is a piece of stream, Fredrik? I mean if it's one customer, if it's a small customer, a big customer, many customers, that's a very difficult question to give you a specific answer. But I mean, at the moment, our confidence remains high that that's not going to be an issue. So our major customers have already certified. So it shouldn't be a big issue.

[Fredrik Reuterhall, analyst]

Okay. Good. And regarding the gross margin, you talked about it was boosted by the royalty payment and inventory depreciation. Can you specify how many percentage points the effect was, so I can calculate more or less the correct margin?

[Julian Read, executive]

Isabelle, is that something [ that would be fair ] to comment on?

[Isabelle Senges, executive]

In percentage -- it was probably a couple of million, so what does it make in percentage.

[Fredrik Reuterhall, analyst]

Okay.

[Isabelle Senges, executive]

We'll need to give you -- to come back to you with a real percentage number, if I -- if you want it.

[Fredrik Reuterhall, analyst]

Okay. And then on marketing spending, you spend pretty low in this quarter. And I guess you will increase the marketing spend quite a bit in Q4, right?

[Julian Read, executive]

Yes. So as I mentioned, we have kicked off a brand restage project. We've engaged with some other good agencies that are able to give us the appropriate type of support. And we're making very good progress on that particular project. So we have a brand restage project that will probably run through to the end of Q1. And in the meantime, we're using the initial insights and work that we're doing off that to build marketing assets for a new type of advertising that we've not done for a long time, should we say, at least for a very long time for the launch of the Leva range.

You might well imagine that it's difficult to buy media at this stage of the year for Q4, like, should we say, traditional big media like TV or out-of-home or print or any of those things largely because it's fully booked. So what we've been planning for is a strong digital campaign, and that will come live in different markets at different time, but probably from the middle of November onwards. And then we'll start spending, obviously, behind that. That will build momentum, not just for Q4, but that will help us to build that momentum and take that momentum into Q1 where we'll continue to support the brand.

[Fredrik Reuterhall, analyst]

Okay. And then my last question is the U.K. and Ireland. It's holding up okay, I think, in the quarter. Can you talk more about what you're seeing in the market there going forward?

[Julian Read, executive]

Yes. The U.K. has got some really good momentum at the moment. We have particular tailwinds, should we say, with a number of accounts where some competitors are struggling for supply, and that's enabling us to have, should we say, extra access to the market with -- than we've had in the past. So we will take full advantage of that type of situation. So -- but in general, I think we're building ahead of steam in the U.K. And again, when we start to advertise behind the brand more strongly, then we'll only be able to build and keep -- build that momentum further.

[Fredrik Reuterhall, analyst]

Okay. That was all for me.

[Julian Read, executive]

[ Tore ]? Not sure if you're still on mute, Tore.

[Unknown Analyst]

Now I think it's better. I was just wondering if you could provide some color on your outlook for the fourth quarter.

[Julian Read, executive]

Well, it's difficult for us to -- we don't tend to give sort of forward-looking statements, as you're probably aware from previous calls. But we -- our focus remains on ensuring that we're filling all the pipelines with our Leva products where we -- and then beginning our advertising campaigns behind those in order to drive sales. And then obviously, I mean, that's the sales outlook. The other piece is that we're continuing to do this piece on the transformation where we will be engaging hopefully, some new commercial staff that will help strengthen the team so that we're building also more ahead for 2025. Nothing -- there's nothing major to flag either up or down at this point in time on Q4 when it comes to sales performance.

Any other questions? Okay. Well, then I will consider that we have completed the call for today.

[Isabelle Senges, executive]

Yes. Thank you.

[Julian Read, executive]

Yes. Okay. Thank you very much for your attendance. Thank you.

[Unknown Executive]

Yeah. Thank you. Good luck.

[Julian Read, executive]

Bye-bye. Thank you.