Cherry SE (C3R) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and a warm welcome to today's earnings call of Cherry SE following the publication of the preliminary half-year figures of 2026. I'm delighted to welcome the CEO, Rogier Volmer; and CFO, Jurjen Jongma. The management will speak in a moment and guide us through the presentation and the results. After [Operator Instructions] We are looking forward to the presentation now. And with this, I hand over to you. Mr. Volmer, please.

Thanks, [ Ingmar ]. Good afternoon, everyone. Thank you for joining Cherry's first half 2026 earnings call. I will start with a general update and some investment highlights. As shared during our last update call, we focus on stabilizing and simplifying Cherry and focus on what matters. First on stabilize. We are aligning the cost base to the revenue. We are bringing inventories back to healthy levels, and we can drive growth on operations and cash. Second, simplify. We are working towards a leaner organization, clear accountability, a smaller and better product portfolio, and faster decisions. And thirdly, on focus, there will be fewer priorities and resources go to the segments where we can win. We will focus on the need-to-have before the nice-to-have. These 3 moves will lead to one ambition, which is for Peripherals to reach breakeven at around EUR 85 million revenue and around 44% gross margin. If you go to the next slide, you will see that when I started, we did a full review, and this slide shows what we said, what we would do, and what has changed so far. On the stabilize part, our operating expenses are lower versus the first half of last year. The gross margin improved materially compared to last year, and the channel normalization is underway. On simplify, we have the new Management Board structure in place, and the responsibilities between Jurjen and myself are implemented. A new leadership team for Peripherals is installed, and we kick off the product review to further simplify our operations. On focus, Project Blossom is launched where we focus on 4 growth initiatives and a cost-saving program, and one of these growth initiatives is our Security & Industry business. And for Digital Health, we are well on track to deliver our ambition for the full year. Two points on the next slide. First, my appointment as CEO was confirmed effective July 1 after my interim mandate. This gives continuity and stability while we execute the turnaround. Second, Jurjen and I both participated in the rights issue. We acquired new shares, and we both oversubscribed, showing our confidence in the direction of the company and the long-term value we can create. With this, I hand over to Jurjen for the financials.

Yes. Thanks a lot, Rogier, and all of you a good day. Before we dive a little bit deeper into the financials, a couple of remarks on today's presentation. First, the final half 1 numbers will be released after the completion of the 2025 audit, and I will come back on this later. Second, our discussion today focuses on operational segments in their current structure to provide the best basis for comparison. For completeness' sake, however, we will show the so-called discontinued operations P&L in this presentation as per the IFRS requirements. Thirdly, the presentation covers the first half performance, where detailed Q2 figures will be made available in the appendix of the presentation, and we will publish that online after our call. Lastly, but equally important is to highlight that in this presentation, we focus on our operational performance, excluding Active Key that was sold to Contour last year. So let me turn to this discontinued operations P&L on the next slide. While revenues continue to reflect the challenging market environment, especially in Europe, we achieved a significant improvement in profitability. Gross margin increased to 43% from 37% in the prior year period, and the adjusted EBITDA loss improved to minus EUR 4 million from minus EUR 10 million last year. This was mainly the result of our structurally lower cost base and an improved margin as well as a positive earnings contribution from DH&S. At the same time, we further reduced working capital, demonstrating our continued focus on cash generation and balance sheet discipline. Our cash balance at the end of June was EUR 4.3 million (sic) [ EUR 4.34 million ] which was further boosted in the month of July on the back of the recently completed capital increase. So let me now take you through our first half 2026 performance. And as I said, the structure of the presentation basically represents the structure of the segments, as you know it. Comparable first half 2026 group revenue came in at EUR 40 million, approximately 3% above the first half of 2025 with EUR 39 million on a comparable basis. When discussing the year-on-year development, it's important to note that this comparison is affected by several extraordinary effects in the first half of 2025. And these mainly relate to the one-off Argand inventory transaction that we did in November of last year. In the first half of 2025, we sold approximately EUR 6 million worth of SKUs that in 2026, we also sold, but then on behalf of Argand and hence, these revenues were recognized as revenue by Argand and not by Cherry. In addition, there were adverse foreign exchange effects of around EUR 0.5 million. Excluding these items, the underlying Peripherals business proved resilient with revenues declining by 3% despite continued challenging market environment. Looking at the individual businesses, CDH continued its strong momentum, delivering a revenue growth of 36% year-on-year, while the Components business continued to face a difficult market environment and recorded a further decline. Moving on to the next slide, I will dive a little bit deeper in the quality of the earnings. Turning to profitability. We delivered a significant improvement in adjusted EBITDA despite the fact that revenues fell short of the same period last year. Adjusted EBITDA improved to minus EUR 4 million in the first half of 2026 compared with minus EUR 10.2 million in the prior year period. This was primarily driven by disciplined cost management and strong margin execution. At the group level, we reduced costs by around EUR 10 million year-on-year, while gross margin improved by 12 percentage points. Both the Peripherals business and DH&S made a meaningful contribution to this improvement. Although gross margins in the Components segment have also significantly improved, top line in Components remains weak. You will find that central costs remain relatively stable year-on-year, which is where a big part of the Blossom efforts are focused on. Now moving to adjusted EBITDA. I've mentioned before that it's important to me and to us that we're transparent as to how and by how much we adjust EBITDA to get to adjusted EBITDA. As you can see on this slide, we adjusted for nonrecurring gross margin effects to the tune of almost EUR 1 million. This particularly relates to lower margins related to selling off slow-moving inventories and restructuring costs in the manufacturing area. Adjustments in operational expenses mainly relate to transaction costs related to the divestment of DH&S. As you know, we have a thriving DH&S business and our difficulties largely relate to the Components and Peripherals segment of Cherry. So let's dive a little deeper into the developments of these segments from a gross margin and from a cost point of view. We've been quite vocal about the fact that we believe that the entitlement margin level for our combined Peripherals business lies around 44%. This relates to sales minus material costs. Year-on-year, we improved this on an adjusted basis from 41.7% to 45.1%. This entirely relates to more focus on margin management and a better product mix. Second, as I will further elaborate on when talking about costs, our so-called gross margin II saw an increase of 12.5 percentage points to 29%. This basically relates to substantially reducing our manufacturing base. We still believe that 29% is not good enough, but the improvement is promising. Thirdly, we must make sure that our cost base comes down. You see this on the right-hand side, where I show that costs have come down from EUR 17.5 million in H1 2025 to EUR 10.8 million in H1 2026, predominantly driven by lower manufacturing costs and lower selling expenses. We've also said that this is not the end of our cost reduction efforts. And in Project Blossom, we plan to take out even more costs. Let me end this financial section with an update on the key topics on the next slide. First of all, let me update you on the status of the 2025 audit and our recent financing activities. The audit is well advanced and the majority of audit procedures have already been completed. However, as you can imagine, the anticipated divestment of DH&S will have a material impact on the remaining Cherry business in terms of size, in terms of planning and outlook, and in terms of financing, and all of these aspects have to be evaluated by the auditor. Consequently, the audit cannot be completed until there is more clarity on the outcome of the divestment. On the financing side, we successfully completed our rights issue. The capital increase comprised up to 9.7 million new shares and was subscribed almost in full. Only 877 shares remained unsubscribed, and these were subsequently acquired by members of the management team. Gross proceeds amounted to approximately EUR 10.1 million and further strengthened the company's financial position. Finally, let me briefly update you on the planned sale of our Digital Health & Solutions business. We have received a number of non-binding offers, which are currently being evaluated. As this process is ongoing, we're not in a position to now provide further details at this stage, but obviously, we'll do so as soon as something new is worthwhile mentioning. With that, let me hand back over to Rogier for an operational update.

Thanks, Jurjen. Thank you. Let me start with our Peripherals business and where we currently stand. Over the first half year, our priorities have been very clear, restoring profitability, normalizing the channel inventory, which, in this case, is Europe only, and sharpen our go-to-market approach. First, we achieved a meaningful recovery in gross margin, as already mentioned by Jurjen. This reflects the benefits of our disciplined cost management, a more focused product portfolio, and improved pricing quality. At the same time, we continue to normalize the channel inventories. We're working closely with our distribution partners to bring inventory levels back to a healthy position over the course of the year, creating the basis for more sustainable sell-through. We have also further refined our commercial approach. Rather than going after broad market coverage, we are concentrating on selected full-service partners and prioritizing product market combinations where we see the strongest opportunities. This reduces operational complexity, lowers inventory risks, and improves capital efficiency. Regionally, our priority is different. In Europe, the focus is on accelerating sell-through, completing the channel cleanup, and launching targeted B2B growth initiatives. In the U.S., we are redesigning the commercial model, reducing the number of SKUs, and further optimizing our route to market together with our reseller network. In China, market conditions remain challenging following the phaseout of governmental support for consumer electronics. And here, our priority is to continue adapting the portfolio to the current demand environment. Let me now turn to Digital Health & Solutions. This business operates in a highly regulated market with high entry barriers, giving strong visibility and attractive long-term growth. The main driver is Germany's telematic infrastructure rollout. Around 150,000 institutions are still to be connected by 2027, which gives a predictable demand. Our certified secure platform already handles secure messaging and sensitive health data with room to expand into further compatible services. We also see a clear path to growing our recurring revenue. We are well positioned to move from hardware-led sales to SaaS subscriptions, and our installed base and terminals support cross-selling additional software over time. In short, the regulatory tailwinds, a growing installed base, and rising recurring revenue give this business a clear sustainable growth path. On Project Blossom, let me summarize again the key operational priorities under this project. The program is built around 5 focused initiatives that are designed to accelerate profitable growth while further improving operational efficiency. The first priority is to strengthen our position in China by accelerating growth in those market segments where we see attractive opportunities by further aligning our portfolio with local demand. In parallel, we are redesigning our commercial model in the U.S. to simplify our route to market, improve execution, and increase commercial effectiveness. The third focus area is expanding our presence in our home country in the DACH region. We see attractive growth opportunities in both existing customer relationships and new market segments, supported by a more targeted go-to-market [ approach ]. We're also investing in our position in the Security & Industry segment, where we aim to further strengthen our market position with a differentiated product offering and deepen customer relationships. And finally, all of these initiatives are supported by a continuous focus on efficiency and effectiveness. We remain committed to simplifying processes, reducing complexity, and allocating resources to areas where the highest value creation is possible. All combined, these initiatives form a clear operational road map to improve execution, strengthen our market position, and support sustainable profitable growth over the coming years. On the next slide, you see the key priorities for the Cherry Group. As you can see from this slide, we have 4 key priorities. We have successfully completed a capital raise, which gives us the bandwidth to implement Project Blossom. As mentioned before by Jurjen, the sale of Digital Health is well underway and several non-binding offers are under review. With proceeds from Digital Health, we will repay debts and strengthen our balance sheet. And last but not least, the execution of Project Blossom will bring us back to growth and a reduced cost base. And we are pleased to share that we are well underway with all these priorities. Let me finalize with a management summary with 4 messages to take away. One, is we are consolidating the plan. The cost base will be aligned to revenue and gross margin is materially up. Two, we have a clear strategy: stabilize, simplify, and focus with one transformation program, which is called Project Blossom. Three, we have a clear ambition. Peripherals are breakeven at around EUR 85 million revenue and around 44% gross margin. And four, is a disciplined execution. Few priorities, clear accountability, and a strong focus on cash and working capital. I will now hand over to Ingmar for the Q&A.

Thank you, Rogier. Thank you very much for the presentation, and we will now move on to the Q&A session. [Operator Instructions].

Some questions from me. The first one is on the [ DOPs ] segment, which seems like you stabilized a decent amount with only a 3% decrease on an adjusted basis. And a few words about [ next ] to explain what -- like the most important changes you made on that business? Was it more like on inventory? Was it more like your partner selection? And on top of that, what is needed to grow the business and increase margins further to reach your '27 target.

So for me, Bastian, the question was not entirely clear. You broke up a little bit. I think your question related to the Peripherals business and how the margin increase came about, whether it was on the back of partner selection, distribution channels, product mix, and things like that. Is that correct?

Yes, it was on margin and on the growth. So only a 3% decrease on an adjusted level. It seems like you stabilized quite a bit. Yes, what measures you took there as well?

Yes. So let me do one part of the equation and then I hand over to Rogier for the, let's say, more commercial aspect of margin improvement. I think one of the major drivers outside of our decision to limit distribution to specific distribution partners is the fact that, as you know, in the course of 2025, a restructuring plan under [ S6 ] was agreed to with the banks, and that basically pushed a fairly steep reorganization and restructuring of the manufacturing environment, and that obviously specifically relates to Peripherals and Components. And this is from a cost point of view, one of the elements that boosted margins. And then I think on the commercial side, and I'll turn to Rogier in a bit, but we're just much more stringent on what deals to pursue and what deals not to pursue, but Rogier can elaborate on that.

Yes. Indeed, Bastian, sorry, I could not reply immediately because you were breaking up a little bit. On the margin improvement, so what we see is it's actually across the 3 regions, so both China, Europe, and the U.S., we see margin improvement versus last year. In the U.S., related to what I shared earlier, is the changed operating model where we decided to focus on fewer accounts, but do them better and also to optimize, for example, promotional spend to make sure that we return on the investments that we do, meaning sometimes less is more in this case. So investing more promotional spend is not always leading to better results. So it's a mix across the countries and across the regions. In Europe, it is, as mentioned as well, is more focused on, say, which customers to work with, which products we want to sell, but also a first step into improved pricing quality in the pricing model and pricing structure that we are kicking off. And you see that these effects are kicking in. So it's early days, but we see that the operational margin indeed is improving versus last year given the input and efforts that we have put in.

Maybe a little outlook on H2. Do you think you can grow the Peripherals business in H2 again on an adjusted basis? Or is that too early?

Yes, it's a little bit too early to say. One point which I raised is that we have still some challenging channel inventories in Europe, which will slow down sell-in. So there, we need to accelerate sell-out or sell-through to get to healthy levels. So it's a bit early to say. For us, important this year is that we are also preparing the company to get to the level where we said we would be next year, which is the stabilized 44% gross margin or the minimum of 44% gross margin. So in 2026, we are working towards that plan for 2027.

Okay. Perfect. And my last question is on the Components business, which, yes, is still in a challenging situation. Would you expect the business to wind down in the future? Or what kind of prospects do you see here?

Yes. We're looking at that as we speak. So yes, it is challenging. And yes, we are looking at all opportunities, and we're looking at all models to make the best decision for the company going forward. So it's under review. And to your point, it is indeed -- it is a slightly more challenging market than the Peripherals business.

[Operator Instructions] And we move on to the next participant [indiscernible]. [Operator Instructions].

I hope you can hear me now.

Yes.

Maybe on top line again, the inventory or channel normalization has been going on for quite a long time. Is there maybe any end in sight, maybe some hope that sales are going to increase soon, maybe this for the beginning?

Yes. Well, hopefully, it's a bit more than hope. What we're working against is that we are trying to normalize it in the course of this year. Also here, what I mentioned as an answer to the question of Bastian is that we're preparing the company, the Peripherals company, to be ready for 2027. So the aim is to reduce channel inventory significantly in the course of this year, where we anticipate to be significantly below what we currently have at the start of 2027.

Perfect. And the second question on cost control. We have seen good progress here in recent quarters. Any bigger initiatives that maybe put pressure on cost or cash planned for 2026?