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

Welcome to yet another quarterly presentation by technology-enabled care company, Careium. Let me introduce CEO, Christian Walen; and newly appointed CFO, David Granath. Welcome, guys.

Thank you.

Thank you.

So after the presentation, there will be a Q&A with joining equity analysts and viewers can also ask their questions in the live chat, and I will pick them up along the way. So David, could you please give a short introduction about yourself?

Absolutely. Yes. My name is David Granath. I joined Careium in August. And prior to that, I was CFO at Polarium and Qliro Group, and I also worked at Dustin and Applied Value before that.

Okay. And what is your first impression of the company?

I mean, my first month at Careium have been really exciting, and I'm very grateful for this opportunity. I'm impressed by Careium, and I'm impressed by the passionate employees. And it's an opportunity to join Careium in this exciting phase of the company's journey.

I agree. And Christian, we are all ears to listen to the results of the quarter and your presentation. So please go ahead.

Absolutely. Thank you. So a warm welcome then to this section of the presentation. We can open up with the next slide there to get the highlights in focus. Oh, I'm supposed to do that myself. Thank you, Mattias. So first off, I think as a company with really high ambitions in terms of where we see ourselves being and where we set our targets for performance, I think we can conclude that the third quarter of 2024 in relation to sales was not a result that we wanted, rather the opposite. While this is, in many ways, as you will see throughout the presentation, driven by the infrastructure delays, you can all rest assured that this is our highest priority going forward into the fourth quarter and the close of the year. Now if there is a silver lining to this for the highlights, I think what is really impressive is that we've actually sustained quite high profitability levels in spite of these challenges to the top line. And I believe it speaks a lot about the solid foundation of our business that we have attained. So more on a positive note in terms of what occurred in this quarter, we launched the i-Care Center. And what is this? Well, to us, it is a transformative innovation. This is an IoT platform tailored to our industry, alarms, data from peripheral technologies and so on, all coming together and being made a lot more meaningful. This is something we've been working on for many, many years, and we're super proud to be able to announce it in this quarter. Also, in addition to our first customer, a German company called MD Medicus. They currently care for 60,000 seniors all over Germany. Compare that to Careium, we have about 340,000 that we directly care for. So this is a large player in the German market, and we are extremely proud that they have chosen our platform as their technology platform for the upcoming years in servicing and caring for these seniors. So this will be a huge part of Careium's future. We will build a lot of our value around this, of course. And we also see it generating about SEK 10 million in savings when it's fully rolled out across our own operation. Last, but not least, we have also opened our commercial office in Spain. And we've been in Spain for a few years. Some of our technology teams are based out of Madrid, but we are now relaunching our commercial efforts. Spain is a fantastic market for technology-enabled care, close to 50 million people living there in the 65-plus age range, which is the sort of target for us. Around 11% already have access to these technologies. Compare that to Sweden, that number is around 9%. So it's actually a little bit more advanced. So we are super pleased to have industry veteran, Beatriz Rodriguez de Lope, long-time sales executive in our industry, to head up that office. So with the highlights out of the way, we move to sales and gross margin for 2024 third quarter. All right. I'll get my notes here. There we go. In the third quarter of 2024, sales amounted SEK 201.7 million compared to same period last year, where it was at SEK 217.3 million. So this is a decline of 7.2%. If you adjust for the currency effect, it's actually 7.9%. So the main driver behind this decline is the product sales due to infrastructure delays in U.K. and Sweden. The service sales, however, amounted to SEK 164.3 million, up from SEK 158.9 million in the comparable quarter of '23. This is an increase of 3.1%. For product sales, we delivered SEK 37.4 million in sales in the quarter compared to SEK 54.9 million in the third quarter of '23. This is a decrease of 35.6% and this is very much driven by 2G and 3G being delayed for an additional year in Sweden, impacting both product sales and tender opportunities; and the same story in the U.K., but for analog. The gross margin ended up at 42.8%, down from 43.5%. It was, of course, somewhat impacted by the product mix effects and so on when we compare it to last year. So moving over to our markets and starting out in the Nordics. The business saw sales grow about 0.5% compared to the third quarter of '23. However, service sales actually grew 7.4% compared to that same period due to majorly contract implementations and wins in Sweden. The main decline was seen in product sales where you could see a decrease of 60%. So this is the full weight of the impact from the announcements made in the middle of the second quarter. For the Nordics, the gross margin remained at similar levels. In the U.K., in terms of volume, a big market, sales decreased 18.9% in the third quarter of '24 compared to '23. Service sales amounted to SEK 45.9 million, down from SEK 50.3 million in the same period of last year. This is a decline of 8.9%. However, we've been telling this story of how we are transitioning out of unprofitable contracts and so on, which is very much true. At the same time, for the fourth quarter in a row, our service sales in the U.K. are actually growing, so the whole plan of transitioning out of bad contracts, bad customer agreements and on to more profitable ones because we see this growth happening at the same time as profitability is increasing in our U.K. operations. So we are sort of tracking our own idea for how to turn the U.K. into a really well-functioning unit that is well in sync with the U.K. actually being perhaps the best market for technology-enabled care all over Europe. Now the product sales, of course, down 33.2% compared to the same period of last year, and this is very much driven by the delay in the switch over from analog to digital. And while sources are a bit unclear, there is no governmental data or anything that is fully fact-checked, so to speak. The estimate is that, as of right now, in the U.K., for this population, these types of technologies, around 40% of the market is assumed to have transitioned to digital solutions. So that means 60% of the installed base is still on analog equipment. And here, we think our expectation is, in due course, this tide will turn. We have a new government there, which has been quite clear on that this is actually a focus area as part of their social care initiatives. So we remain confident that over time, things will change. Gross margin declined slightly in the third quarter of '24, and the main reason for that was temporary field service costs. With that, we head over to the Netherlands. So the Netherlands delivered a steady and consistent good growth of 13.8% for the fourth quarter of '24 compared to same period '23. Sales were driven both by organic growth and also new customers onboarding into our operation. We've enjoyed very healthy growth for a long time in the Netherlands, and it just proves that our operation is very well set to meet customer demands. Gross margin in the quarter was 59.6%, which is a slight uptick compared to the same period of last year, where it was at 54.8%. But as I have commented on previously, all our markets work slightly differently. So this is not a transferable setup with these gross margin levels to other markets. It is unique to the Netherlands and costs are taken at the OpEx level. So for other markets, including then now Spain, of course, but we have not seen so much action as of yet there in terms of just setting up the commercial office, so predominantly DACH and France, we actually saw sales decrease 15.5% compared to the same period of last year. However, this was not related to any infrastructure delays. But if you look to the first half of the year, you will see that these markets have really performed exceptionally and the year-to-date growth at the end of this quarter is 60%, actually a bit over that. So we expect things to pick up in the fourth quarter. When markets are a little bit smaller in our industry, you get more variance throughout the year. So really positive about seeing the Spanish office in place, we expect it to contribute both to the growth and the profitability during 2025. Gross margin for other markets was set as 61.5% compared to 50.6% in 2023 same period, and this is mainly due to product mix. And with our markets out of the way, I am extremely pleased to hand over to David, our CFO, to take us through the profitability and cash flow. So I will do you the honors for you here.

Thank you, Christian, and now an update on the profitability for the quarter. EBITDA amounted to SEK 34.3 million compared to SEK 44.1 million for the same period last year, giving an EBITDA margin of 17% compared to the 20.2% last year. Despite the weak sales impacting EBITDA margins negatively, we managed to maintain profitability on healthy levels. Gross margin nearly kept on the same level as last year, and as Christian mentioned earlier, our efficient operations can endure variations in sales. EBIT was SEK 16.5 million in the third quarter compared to SEK 20.7 million last year. During the quarter, we launched the i-Care Center. And with that, we also see an increase in depreciation somewhat impacting EBIT margin development quarter-on-quarter. And with that, moving on to cash flow. Cash flow from current activities in the third quarter of '24 amounted to SEK 13.6 million compared to SEK 1.6 million for the same period in 2023. Working capital tie-up in the quarter was SEK 16.2 million driven by increased inventory levels following lower-than-expected product sales and delivery of rental equipment. Free cash flow was SEK 3.3 million. And over the past year, we have accumulated SEK 56 million of free cash flow. Cash totaled to SEK 29 million at the end of the quarter. And in addition, the bank overdraft facility had unutilized amount of SEK 39 million, resulting in available cash of SEK 68 million, enough to continue to grow our business. And finally, net debt amounted to SEK 180 million at the end of the quarter compared to a net debt of SEK 228 million last year, a reduction of nearly SEK 50 million. And with that, I hand over to Christian for summary and conclusions.

Thank you, David, and also fantastic to have you as part of this presentation. As we concluded in the report released this morning, we not only got David onboard, but the quarter also saw us recruiting our new CTO to start following the quarter. So we are really, really happy to see such great talent joining the Careium journey. So thank you, David. So concluding remarks for the Q3 2024, number one, as mentioned, we are a very competitive and very ambitious team. We are not happy with our sales development for this quarter. However, silver lining, being to David's point, that, in a way, it is also something that shows that we have a very solid and stable core operation that can absorb these levels of variations predominantly related to hardware. The launch of the i-Care Center is truly at our biggest innovation. We have a long history of a company of releasing what is now the gold standard for alarm-receiving protocols, the first digital care phones and so on. And now we launched the ICC, or i-Care Center. This is transformative, not just because it opens up to sector-specific IoT platform and all the value that comes out of that, but it is also a new revenue stream for us. So we can have platform sales in a different way, and we can also bundle it together with our offerings. This is really something that strengthens both the internal side in terms of efficiency and cost saving but also something we offer to the market that we are extremely happy about. And last, but not least, I think opening up the Spanish commercial office with proper staffing is a great move, fantastic market, we need to be there. We've been there for many years. We have a lot of industry competence predominantly on the technology side, but we also need to sort of sharpen the saw in terms of our commercial operations. So that's good. The main challenge, of course, is this full weight of these transitions. In a way, we need to work twice as hard to try and generate as much sales as possible because there is a slowdown in the sales. We are very much doing that. But it is a tough work, and we are consistently doing it on a daily basis. This also translates to our #1 priority. It is to focus on the sales activities, both in the tender side and also in the direct sales, more in the B2B channels, where our sales staff are working very, very hard to perform as well as we can. And the second big priority for the quarter ahead is, of course, continuous development and transition of end users for the ICC, both to generate the savings, build a stronger platform and also to take more customers onboard as this technology is now open to all prospective European customers. So in closing, in relation to the guidance, we expect to deliver our stated guidance range of 5% to 10% of growth for the full year and the EBIT range of 7.5% to 10%. And with that, we conclude the presentation and open to questions.

Thank you so much. Yes, it's Q&A time. And there are a lot of questions from the viewers and from myself, I think, but we will start off with the questions from Oscar Ronnkvist of ABG Sundal Collier.

So I think I'll just start a little bit on the guidance into Q4, more on the sort of visibility side. So the delays are obviously weighing quite hard at the moment, especially on product sales. So do you have any sort of comments on how we should think about the normalization timing? Any color on the tender activity? And also quite a broad range going into Q4, any color on the timing and visibility?

Well, I mean, our ambition since we have revised the guidance a couple of weeks back, we have, of course, put a lot of work and effort into trying to create the most transparent and best way of guiding the market, and when we say that we expect to deliver on to the ranges that we have stated, then that is what we aim to do. And we do see that, as you can conclude, we have decent growth in the service segment. This is also, to some extent, impacted by the transitions because the urgency might be going down a little bit, but we're still very, very competitive. It is mainly on the product side. And there are no shortcuts. I mean we need to work extremely hard. We have added additional resources, put new processes in place, new tracking and so on, to make sure that we are delivering as well as can be even in the markets that are impacted by these transitions. I mean, at the end of the day, we are not a company where we see that, "Okay, so we have some headwinds right now, let's wait them out," we try to run twice as fast. And that always takes a little bit of time, and you need to double the effort, and that is what we're doing, and thus we are retaining the guidance.

All right. Can I just follow up on the cost control? It seemed quite good in the quarter and I noticed that admin costs keep falling sharply. So have you done, I mean, the complete of your restructuring now? Or could we expect that as a new bottom? Or do we expect that keeping to fall? Or any color on that, please?

Well, I mean, we always try to be more efficient, but we also need to invest in our future growth, right, to be able to accommodate and manage it in a smart way. So I would not provide any other sort of comments outside of the stated range in relation to profitability. We aim to deliver along those lines. And that means that we will need to keep our cost control in check. I think we are. However, there is some -- if we look to the future, I mean, if you're a technology company, you need to make sure that you have great talent and great development across your technology offering. So that is maybe where I see that we should be investing more. I don't see us growing administrative expenses in any crazy way, then we probably need to double the size.

Right. Perfect. Just some color also on the Spanish outlook. So what types of contracts do you see likely in this region? Will it sort of mirror the U.K. contracts, be B2B concentrated, B2G or more sort of private pay? And also, if you have any color on the timing of the effect in 2025, can we expect that to contribute already early '25? Or is that going to be sort of more tilted towards the latter part?

No. Very good question, Oscar. Thank you for that. So the Spanish market is a combination of a very, very strong public sector, but it is served by a lot of private entities. So you have your tendering akin to the Nordics directly to the public, the regions of Spain predominantly, and you also have the partnerships with those that bid on those contracts. And these contracts in Spain come in many different forms and sizes from quite small ones that we could probably engage with ourselves without too much effort and worry, and the biggest contracts in all of Europe, which are the Madrid and Barcelona hardware-related contracts and also platform and some software. So Spain kind of has it all. It is one of the most developed telecare sectors, and it's also very different compared to many other markets that tend to be a bit more reactive. So you respond to needs from the seniors, whereas in Spain, 2/3 of the operator activity is actually proactive. So it's outbound. So they kind of reverse the whole thing. I think it's quite impressive actually. And it's really important for us to also be in a market that is a little bit on the forefront, same with the U.K. on technical innovation. So there's tons of values for us to be in that and adapt and design our offering to be competitive because we can transfer that to other markets. So just to answer your question clearly, the predominant side of the Spanish market, around 60%, 70% of our volume, that is tendered business. Now that is very rarely sole-sourced. It's usually an installer coming together with a hardware provider and so on. So we can be a part of that with good partnerships. And the remainder of the market is more straight-up B2B focused on hardware and software. We don't think that we will see immediate effects in 2025 due to the tender-based nature of the market. However, the talent that we have put in place, I think you'd struggle to find such a strong individual as Beatriz that we've managed to take onboard to lead these efforts, 12 years as a sales executive in this industry, extremely successful. So hopefully, we'll be able to close the '25 with a very positive outlook on what we've achieved, but I don't think it will happen in January, so to speak.

Understood. Just had some questions also on the gross margin. I think it looked quite healthy in the quarter, quite stable quarter-over-quarter and also year-over-year. It was affected by both the U.K., I mean, the higher service sales. And also, I mean, if you could talk a little bit about the mix here. And also, I mean, given the decent underlying development for the total company, I mean, have you optimized the gross margin? And can this expand going forward? And just as a sort of a follow-up, the i-Care Center SEK 10 million support, is that coming through to the gross margin? Or is that more OpEx related?

David, do you want to take a stab at this one?

No, but I think I agree with what you're commenting. I mean the gross margin is on a healthy level. It's almost the same as last year. We see some mix effects, both in terms of regions and in terms of product sales. So of course, we keep on working with it, but I don't see any very much potential. But we keep improving as we go. On the i-Care Center, that is OpEx related. I had to think a little bit. Yes, it's OpEx related. And as we transition customers into our own platform, it will continuously show on the OpEx side. It will start to show a little bit in '25, but it will also be a transition over time.

But I think to your question also, Oscar, do we feel happy that we will be set at this gross margin level for years and years to come, I definitely think there are things we can do. Some of them is about being technologically smarter, some might be in relation to negotiating contracts with sub-suppliers for certain things. And above all, it is how much can we drive down prices on hardware, thanks to bigger volumes and slight retrofitting, kitting new versions and so on. So that is a huge part of the COGS side, so to speak. So there are a bunch of levers that we can pull. We're pretty occupied with the ones where we see maybe the most immediate value, but it takes a bit of time. If you take something like adapting one of our core units to use a different component set, you need to do that quite carefully and with a lot of testing before you can sort of take it to the market. So the lead times on some of these bigger tickets, it's actually quite long.