Careium AB (Publ) (CARE) Earnings Call Transcript & Summary

Thank you very much, and good morning, everyone. Welcome to Careium's Interim Report for the Fourth Quarter of 2021 and our First Quarter Report as Careium. Joining me today as well is our CFO, Mathias Carlsson. Next slide, please. As I said, this is our first quarter as a separately listed company. On December 10, last year, we completed the journey of becoming a listed company on Nasdaq First North. After building and creating one of the leading businesses in Northern Europe in technology-enabled care, the listing was the highlight after many great achievements by the organization throughout these years and with a separate listing. Next slide, please. A few highlights from the fourth quarter of 2021. The positive sales development continued in the fourth quarter, achieving the highest quarterly sales in a single quarter for Careium. We implement our first largest installation in assisted living, expanding our market segments in line with our strategy. The gross margin in the quarter improved, although we have had continued negative effects from higher cost of goods sold, due to high component and freight costs, as well as additional costs to maintain our high-quality in service delivery during the pandemic. The operating profit in the month -- in the quarter, have been challenged predominantly as a consequence of increased costs being a stand-alone listed company. The mentioned increases in supply chain cost and service delivery costs during the pandemic, but also to a large extent as a result of accelerated transformation in the U.K., creating a stronger foundation for us and making sure that we quickly integrate and capture the synergies that we see in the United Kingdom. Next slide, please. Sales and gross margin in Q4. Net sales in the quarter equaled SEK 162.3 million, which is an increase of 12.2% compared to the same period last year and an increase of 15.2% compared to the third quarter in 2021. And as I said, SEK 162.3 million is the highest quarterly sales for Careium in the history of the company. The organic growth in the quarter equaled 3.5% and was mainly driven by good development in the Nordics, and especially implementation of the number of new contracts that we won earlier in the year in Sweden. Sales of services increased by close to 16% to SEK 126.8 million, with a number of new contracts implemented in Nordics and the acquisition of Innocom in the third quarter. While share of services in the quarter equaled 78% of total sales. Gross margin in the quarter was 40.5%, which is an increase compared to the same quarter last year and also an increase compared to the third quarter of 2021. And this is despite the higher costs of goods sold and service delivery during the pandemic. The number of connections increased with close to 5% in the quarter compared to the same period previous year and equaled 390,000 connections in the quarter, which is the same number of connections at the third quarter of 2021. Next slide, please. So a few market highlights for our different regions, starting with Nordic and the United Kingdom. In Nordic, the fourth quarter was, in many aspects, a good quarter for us in Careium. Sales increased with 20.4% following implementation of new contracts in Sweden and also increased sales of Eliza in Norway. Sales also increased strongly compared to the third quarter in the region. In Sweden, we also continued to win a number of new contracts in the quarter, strengthening our already market-leading position within individuality. But we also in Sweden implemented our first major customer in assisted living, expanding our offering and presence in a new segment in line with our strategy. Quality and service delivery, both in -- or in the Nordics and then predominantly, of course, in Sweden and Norway have been impacted by the pandemic with increased short-term sickness over time, et cetera. But we have managed to maintain our high-quality in our service delivery throughout the quarter despite some challenges or consequences from the last wave of the COVID-19 pandemic. Number of connections in the quarter equaled 124,500 which is an increase from the third quarter of 2021. In the United Kingdom, we have suffered from challenges in integrating the acquired businesses, and sales decreased with 9% to SEK 56.1 million in the quarter, which is also negatively impacted by write-downs of expected sales. To address the challenges in the region, we have accelerated our transformation of the business to increase both profitability and strengthen our foundation for growth. This includes, just to mention a few, creating one legal units in the region, making sure we consolidate the number of active sites we have. We have already in January closed one of our sites in the region, increasing efficiency in service delivery and also appointing new management in the region. Connections in the region or in the United Kingdom equaled 238,100, which was a decrease of 3.4%, sorry, 3.6% compared to the same quarter previous year. Next slide please, and some highlights then for Central Europe and other markets. Sales in Central Europe increased with close to 64%, equaling SEK 23.4 million. And it was a strong quarter also compared to the third quarter of 2021. The strong sales increase in Central Europe is mainly a result of the acquisition of Innocom in the Netherlands that we concluded in the third quarter, as well as good demand for our products in the region, and then especially Germany, where we have a strong position with a number of key customers in the country. And we have also started the migration and implementation of our first major customer for our Software-as-a-Service platform, which will be completed within the next 2 months in the region. In other markets, sales increased with 47% compared to same quarter previous year, equaling SEK 2.5 million, which is driven by an increased demand for our mobile social alarms in especially France. Next slide please. A little bit about profitability in the fourth quarter. EBITDA adjusted for restructuring costs equaled SEK 18.3 million, a slight decrease compared to same period last year. EBIT adjusted for restructuring cost was SEK 0.9 million, which is a slight improvement compared to the third quarter 2021. Our profitability has been burdened by the increasing costs for components, rate, high cost for high-quality service delivery during wave of the pandemic, as well as extra costs, which are mainly relating to the accelerated transformation in the region United Kingdom. The operating profit during the quarter positively affected by a revaluation of estimated additional purchase price through acquisition of $9.7 million. Next slide please. Cash flow in the quarter. The cash flow from current activities during the quarter was $34.1 million, which is a clear improvement from the same period last year, as well as previous quarters due in 2021, where the improved cash flow is mainly a result of improvements in working capital during the quarter. Free cash flow was close to SEK 16 million in the fourth quarter, which is also a significant improvement from previous quarters. This resulted in a net debt decrease to SEK 149.7 million in the quarter compared to SEK 191 million at the end of the third quarter. Next slide please. And some concluding remarks. This was in many ways a special quarter in which we took many steps in the right direction. We completed our listing on Nasdaq First North and are now trading and operating as a stand-alone listed company. The positive sales development continued, reaching all-time high net sales in the quarter. Gross margin also improved compared both to the third quarter and the same period last year. We implemented our first larger customer in assisted living, in line with our strategy to expand our market and offering, which we'll continue with going forward. We have also started to migrate and implement our first larger customer into our Software-as-a-Service offering in region Central Europe. Even many positive aspects in the quarter, it was not without a number of challenges where we will focus on improving, especially our profitability going forward. The profitability in the quarter had been challenged by high cost in components and freight, as well as necessary measures to maintain high service delivery during the latest wave of the pandemic. But also as the business in United Kingdom have not developed as it should, as we expect, we have accelerated our transformation on the region to ensure we extract the synergies and build a solid platform to further capitalize on the market opportunities, we are confident we'll accelerate as the digital shift will increase its pace. We continue to strongly believe in our strategy and we are taking clear steps in moving towards becoming the European market leader in technology enabled care. Thank you very much for attending and listening this short update on the fourth quarter. And we now move on to a Q&A session, so I can ask you to go to the next slide, please. So you can move into Q&A, and let me know if there's any questions from anyone on the line.

[Operator Instructions] And our first question comes from the line of Rebecka Garderup from ABG.

The number of subscribers were flat quarter-over-quarter, meaning that you could implement some of the contracts that have been pending. But do you still have pending contracts? And could we expect an organic growth of subscribers in the next few quarters?

Yes, we still have and especially in the Nordics and in Sweden a number of pending contracts to implement and especially contracts that we won in the fourth quarter. I think as discussed in previous webcasts, there's been some delay in implementing one contract during 2021, which we caught up on the contracts from Q2, Q3 in the fourth quarter. We are still to implement a majority of the contracts that we won in Q4 now during the first half, first few months of 2022.

All right. And the gross margin were 1 percentage point better than the previous year. Can we conclude, on the back of this, that the price increases for components are heading in the right direction? You still mentioned that as a reason for cost increases.

I would say unfortunately not, because maybe we start to see that the component costs are -- it's not the same pace of increased component costs. But I wouldn't say it's over yet. And I think as we all see now inflation is increasing. So I would expect that component cost will continue to be high in the coming quarters as well. We, of course, do what we can, even though we have long customer contracts, given to the opportunity to adjust prices short-term are sometimes limited, but we, of course, do what we can to make sure we adjust the prices we take when we deliver our services and our products to a large extent, as possible, mitigate for the increased component costs.

And also one more question about the difficult with finding synergies in the U.K. What are the challenges there? Should we expect this to take a few quarters of this kind of one-offs? Or is this just in this Q4? Or should we expect this to come also in the Q1 or Q2?

I said, we have accelerated our transformation in the U.K. to make sure that we build a strong foundation in the U.K., making sure that we capture the synergies that we are confident do exist in our business in the U.K. And of course, most importantly, create a really strong foundation to drive strong organic growth, especially on the back of the digitalization that it's bound to happen in the United Kingdom, where we want to take a leading position in doing that. In order to achieve a stronger business in the U.K. with improved efficiency, improved profitability and a stronger foundation for growth that will take some efforts during 2022 as well. And there are likely to be some costs associated with driving the transformation and achieving the transformation in the U.K. also during 2022.

And one last question. The Innocom in the Netherlands, how is that integration going? Is it easier to find synergies in that region?

It's -- I think so far, Innocom has been a very good addition to carry. We have continued to grow the business in the Netherlands during the fourth quarter, strengthening our market position. I think the integration of Innocom or what we do with Innocom is making sure that we take the good things from Innocom, see what we can transfer to other parts of Careium and transferring the good things of Careium, the product and the services we have in Careium to Innocom. So to some extent, it's a lighter integration than what we need to do in the U.K. where we have a number of acquired entities that we want to integrate, making sure that we drive, sort of becoming one entity in capturing the synergies from several entities in the United Kingdom.

Our next question comes from the line of Niklas Savas from Redeye.

I wonder if you could bring some more color to the restructuring in the U.K., which came somewhat as a surprise. Was there a certain catalyst that led you to do it now? And I mean, you mentioned that you lost quite a few connections. And maybe you can bring us some color on that as well.

Yes. Niklas, I think we have not had the performance that we want in the U.K. from several different aspects. I think we have not seen a growth that we want in the United Kingdom. And we can say we haven't seen market growth taken off yet, the digitalization is still very early on. So we haven't really seen market taking off from that perspective. But still, we have not performed as we want and as we should when it comes to growing our business in the U.K. And we've seen struggles in making sure that we become one strong business and one strong entity in the U.K., which have, I would say, being amplified by the pandemic, it hasn't been easier in a situation where almost 50% of the time in the last 2 years, the region had been in lock down, people working from home, which of course had made it more difficult to drive our consolidation agenda in United Kingdom. Having that said, even though, of course, yes, there is still a number of factors may be more difficult. We have not been as successful as we want it to be and as we should be. And that's why we now because we still are confident there are very good opportunities for us in the United Kingdom going forward, while we now have accelerated and putting extra efforts in making sure we create a very strong and profitable United Kingdom region for us.

Fair enough. And on the cost inflation, you see, you managed -- you mentioned the cost inflation in components, but I guess the largest cost item for you is staff cost. And I just want to ask what -- do you see any pressure there on possibly inflation? And how can you protect yourself against that in terms of your contract -- your long-term contracts you have. So do you have any inflation adjustment incorporated in those contracts? And yes, maybe bring some more color on that as well.

Yes. I think as we said before, and of course, it differs slightly from region to region. And as we mentioned before, especially in Norway, we've seen quite high increases in staff cost of personnel, especially nurses, since everyone we have working in service delivery in Norway are qualified nurses. And in Norway, just as in many other markets, there's been a big shortage of nurses and as a consequence, we got a quite high inflation in the salary costs for nurses. So we have suffered to some extent in Norway from that perspective, a little bit less in other markets. But I think just as -- if we look forward, the trend is it would probably follow the general inflation that we see in other sectors as well. From a contract perspective, we typically have a possibility to increase prices based on, as you say, some general inflation rates or KPI adjustments on a yearly basis. So we are, to some extent, protected from increased inflation increases, we say, in salary costs. But that's where, as I mentioned earlier from Rebecka's question, but it's not always easy to enable transfer the full additional cost when it comes to components, grades, other elements that might not directly show in increased inflation in the local country.

Okay. Great. And on the Nordics, which surprised is on the upside with quite high growth. You mentioned the Eliza in Norway, for example, was that connected to a specific contract? Or has it been like that you have sold it in retail? Or yes, maybe you can explain that.

Yes. It's been connected to certain municipalities and contracts that we've won during the year. And then I'd say, in Norway and in certain markets, depending a little bit on who the customer, call it, customer acceptance tests, sometimes it needs to be done with a specific maybe alarm receiving center software that they are using. And that's something that we carried out during 2021, which was finalized late third quarter, early fourth quarter, while we could start the deliveries of Eliza to some of the long contracts in Norway.

That's great. Last question I have is with regards to the service delivery in Sweden. I think we have all seen the reports in the media with some struggles there. And maybe can you explain what has happened and what measures you are taking there?

So -- and I think with the recent challenges from a service delivery perspective was here in the first quarter and 2 weeks ago, which was a result of network-related challenges from one of the larger operators in the Nordics, where a few thousand of our units were impacted by this network incident, which, in certain cases, led to longer response times, but where typically there is the alarms connected to the ARC as they should and within time. But in certain municipalities, in certain incidences the response time was a bit longer. From our perspective and what we do in order to mitigate these events as much as we can. And of course, firstly, we have wherever possible, so fully redundant solutions to make sure that our service deliver would be up and running all the time. So you could say, essentially backup in all aspects of the chain. Secondly, as we -- in the Nordics especially, we have all digital alarms, we can quickly identify which units are not online and not working as they should and then proactively together with both the customers and the end users, notify them if there is a problem and making sure that we take any, if necessary, mitigating actions to make sure that the end users are protected.

[Operator Instructions] And as there are no more telephone questions registered, I hand back to our speaker.

Okay. Thank you very much for listening into the webcast. As I said in the concluding remarks, there are many positive aspects from the quarter, the highest sales in a single quarter for Careium, despite some of the challenges that we discussed during the Q&A, we've managed to increase our gross profit. We have implemented our first largest solution in assisted living, and we are on the verge of implementing our first larger customer for our Software-as-a-Service platform. But of course, there are challenges in the quarter that we need to address and that we are addressing, especially in the United Kingdom, where we now have a very strong focus on accelerating the transformation in the U.K. to improve our profitability and our foundation for future growth. So thank you very much for listening in. Have a great day, and I guess I'll speak to you soon again. Thank you very much.