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Edited Transcript of HANDI.ST earnings conference call or presentation 24-Oct-19 8:00am GMT

Nine Months 2019 Handicare Group AB Earnings Call

Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Handicare Group AB earnings conference call or presentation Thursday, October 24, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Pernilla Lindén

Handicare Group AB (publ) - CFO

* Staffan Ternström

Handicare Group AB (publ) - CEO & President

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the interim report Q3 conference call. (Operator Instructions) I must advise you that this conference is being recorded today, the 24th of October 2019.

I would now like to hand the conference over to your first speaker today, Staffan Ternström. Thank you. Please go ahead.

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Staffan Ternström, Handicare Group AB (publ) - CEO & President [2]

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Thank you, Tom. Good morning, everyone, and welcome to Handicare's presentation of the third quarter results. My name is Staffan Ternström, and I'm accompanied here today by our CFO, Pernilla Lindén. We will start by having a short presentation of the results and the key highlights for the quarter and then follow up with the Q&A.

So next slide, please. First, if we conclude the third quarter, we're not satisfied and had expected more. Now we came in almost flat on top line and lower than expected in our projects.

In the quarter, I've been around all major sites and sales offices. And I can see that we were very focused and very hard to drive our agenda to improve customer experience, service quality, efficiency and to deliver on our innovation programs. Still, we need to see the results coming through.

What we are pleased with is the solid growth in Accessibility of 3.4%. Stairlifts growth in North America, almost double-digit growth and with a good pipeline for the fourth quarter. EU has double digit with the exception of U.K., and that's very unfortunate for us since U.K. is our biggest market.

The shortfall in the U.K. is market-dependent and due to Brexit and uncertainties in the consumer confidence there. We see much longer sales processes and we see a few dropouts when people wait to place their order. But I think it's important to mention here that we have not lost share. It is a market decline, and we consider it to be temporary with the Brexit uncertainties.

Finally, in Accessibility, we are happy with that our auto business, even if it's moderate, is back to growth. We're also very pleased with the successful launch of 1100 in the U.S., and that's been the main thing that we've been talking about. I had the opportunity to be there with the team at the launch, and I was very glad to see a number of things.

But a few things to highlight was that great customer feedback. They really appreciate the innovation of this totally new stairlift. And it's easy for our dealers to install and service, and they see the benefits of that.

More dealers we have trained than we have initially planned, and we knocked out up to more than 50 dealers that we trained. And our estimates for 2019 for the quarter when it comes to 1100 is up 80%. And the good thing with this new stairlift is that roughly 1/3 of the orders is either to the new customers or dealers, or it is an increased share of wallet with the current dealers we serve with, for instance, current stairlifts today. So very good launch there.

If we look into Patient Handling, institutional U.S., that continues to be a challenge for us. It has been our turnaround case, and we're still working on that. And what we are waiting for is the impact from the changes and improvements we are making.

Canada, on the other hand, almost as big as U.S. Institutional in sales, delivered double-digit growth for the quarter. So we know that if we make it right, we can get it there.

Europe and rest of the world in institutional -- or in Patient Handling is more of a short-term challenge. We do well in direct -- in our direct markets, such as Nordics, U.K. and Netherlands, but struggling in a few distributor markets, with a few specific distributors.

If you look into the EBITA profit margin, it has decreased from 9.1% last year to 7.2%. And it's due to lower gross margin mainly driven by country mix and reduced cost absorption. Finally, we had a quarter with a very strong cash flow of almost EUR 7 million.

Before I hand over to Pernilla, I also want to announce that the Board has initiated a strategic review. I will get back to what that means at the end of the presentation today before the questions.

So by that, I hand over to Pernilla.

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Pernilla Lindén, Handicare Group AB (publ) - CFO [3]

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Thank you, Staffan. We are now at Page 3 on the presentation. So revenue amounted to EUR 65.6 million, a growth of 0.6% in reported currency; but in constant currency, a growth of 0.2%.

As Staffan alluded to, a very different performance across the business entity. Accessibility had a growth of 3.4% in constant currency, continued solid growth in the Stairlifts business and back to growth in our Vehicle Accessibility, according to our expectations. The Patient Handling business declined overall with 7.7% in constant currency due to -- mainly due to the lower revenue in both North America or U.S. and Europe.

If we then look at it from a margin perspective, our EBITA at EUR 4.7 million and adjusted margin at 7.2%, which is down with 1.9 percentage points compared to last year.

The main deviation comes from gross margin decrease compared to a strong Q3 -- Q3, sorry, last year. The decrease is primarily due to [weaker] fixed cost absorption coverage, country mix due to strong growth in countries where average selling price is lower than the average for the group. And in spite of that we've had cost efficiency program in the North America business, slow sales led to a lower fixed cost absorption in the U.S. And also, the margin was impacted from lower utilization and an inefficiency in installation capacity in the U.K.

We had an improved operating leverage on our cost side. Operating costs decreased compared to last year with EUR 0.4 million, primarily linked to lower costs in IT and variable compensation. Group costs at EUR 2.5 million, which is lower than last year and earlier communicated EUR 3 million level.

After a weak Q2, we have a strong operating cash flow of almost -- of EUR 6.9 million compared to last year of EUR 0.8 million. And this is primarily linked to improved working capital, our continued focus on cash collection and reduced inventory compared to last year. And finally, we had a leverage of 3.1x operating profit, and that excludes the IFRS impact.

Overall, throughout the presentation, numbers are not including the IFRS 16 impact. The IFRS 16 impact on EBITA gives a net positive effect of EUR 100,000. Adjusted EBITA is EUR 4.7 million, but including the IFRS effect, it is EUR 4.6 million.

Let's then turn to Page #4, on the Accessibility. As said before, Accessibility, organic growth of 3.4%, a solid organic growth in Stairlifts business with a growth of 3.7% and the North American market growing 9.1%. And we also had a strong continued growth in some of our major markets in Europe, such as Germany, Netherlands and Italy. But as Staffan said, this was partly offset by the weaker market in the U.K.

Vehicle Accessibility business returned to growth for the quarter. If you look at the margins, we have an operating margin of 12.9%, which is down with 2.5 percentage points. This was an unfavorable quarter in terms of country mix in Stairlifts due to strong growth in countries where ASP is lower than the average of the group.

You could say that, for example, in U.K., our direct sales channel were a little bit slow. And there, we have a higher margin than the direct sales that we have in Netherlands, where we have a lower average selling price. And as said before, the margin was also impacted of lower utilization and inefficiency in installation capacity in the U.K.

We also had an unfavorable product mix in the Vehicle Accessibility business due to the higher proportion of ambulance sales. Operating expenses were down slightly in relation to revenue.

If we then turn to Page #5 in the presentation and talk about Patient Handling. The Patient Handling business declined overall with 7.7% due to a lower sales in both North America and Europe. The North America business showed a decline of 9.1% mainly driven by our lower sales in our institutional customers in the U.S. Staffan will get into more details around North America in a while. The European business is affected by lower sales to some of our major distributors.

If you look at the margin, we have an operating margin of 6%, which is down 2.7 percentage points. This is driven by higher operating expenses in relation to revenue, in combination with somewhat lower gross margin. Both are mainly driven by lower cost absorption in North America. Operating expenses were unchanged in nominal terms. Profitability, European operations remains good.

Now I would like to hand over to Staffan again for some more...

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Staffan Ternström, Handicare Group AB (publ) - CEO & President [4]

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Thank you, Pernilla. And what we normally tend to bring in here is a little bit of an update on North America. And in North America, I think we see the 2 halves of it, yes.

In North America, we see some great things happen in the Stairlifts business. And we, at the same time, continue to be challenged in the Patient Handling business in the U.S.

So if we look into some of the Q3 achievements, I think we managed to launch the 1100. We did train a number of dealers. We didn't ship any products. They actually arrived just after the quarter end. And then we're getting a supply into the fourth quarter, so we started to ship out to customers. And I alluded to that we're very pleased with that.

Elite Dealer program that I talked about last time, and it's an industry-unique program helping our dealers to do really better business. And it includes things like how we will help them with their sales, with their presence and with their lead generation, very important aspect of being a successful dealer. And -- so we've signed up big dealers. And I'm very happy to say that we are well ahead in terms of signing up dealers after the third quarter, and we had a very good plan for the fourth quarter. So good acceptance for that program and also in line with our strategy to focus on bigger dealers.

And we also have been, in this quarter, transferring from a HUB setup where we had full-service hubs into more of regional sales offices. That gives us a number of different focuses in those hubs -- in those sales offices, where we focus more on sales and elevated showrooms, training facilities. And we also deployed field trainers into these regional sales offices so we really can support our dealers close by. So that's what's happening there.

What we are also doing is that we centralized customer service and telephone tech service into St. Louis and make that a center of excellence where we ship into all of the countries within 2 days across the country. The benefits of that is that we're able to keep customer service open, for instance, from 7:00 Eastern time to 7:00 Pacific time, meaning 15 hours a day, which is a great benefit for those dealers which may come in -- go out early in the morning and come in late back in the evening and still place orders and dialogue with us.

The other thing, it gives us benefits all around processes and inventory control -- such as inventory control. That switch we've been making, and it's been going smooth so far. Now it's to the next step to leverage the benefits of that.

And a part of that is our continued focus and improvement in the order-to-cash process, which is very important service offering and that we do that well. I talked about how we, in the past, had a miss rate of 15% or 1 out of 7 orders went wrong in one way or another. Then we improved to 1 out of 20, and we're now down to, once in a while, 1 to 25, and we're getting into that [high density] very well. We will continue to focus on that.

We have a new VP of Corporate Accounts, and that's mainly for the Patient Handling in the U.S. And that individual will start focusing on the very important IDNs and Veterans Administration and big purchasing groups.

I did talk about this. In Canada, which the institutional business towards Patient Handling is almost as big as it is in the U.S., and in Canada, we get it very [wide]. And we're able to get a big share and we're able to have very strong double-digit growth in the quarter. It obviously swings a little bit over the quarters, but we had a very good quarter there.

If you look at the last bullet here and the results from the actions we've been doing in the U.S., it is for us to drive our competitiveness up. It's not necessarily a market issue. It's about us getting the right -- the things right. We've been, I would say, estimating the changes to start to bite, which they haven't done yet. So we need to continue to focus and drive the activities we have in the Q4 activities.

So if you look to that side of the slide, we continue to leverage the benefits of the 1100 launch and further deploy the Elite Dealer program, and we will have some solid double-digit dealers, Elite Dealers by year-end signed up. We drive the effectiveness and the service levels through the new regional office setup and the centralization of certain functions into St. Louis. And then we continue to put a lot of focus on our sales force effectiveness and I call it improved value proposition program for U.S. Patient Handling institutional. And this is about driving change, and it takes some time.

Very important and a big priority for us is to hire that VP of institutional sales into that market and have that person continue to drive the change. And then we have a set of other activities that we're focusing on as well, which I've been talking about a few times before.

So to sum up the third quarter, organic growth of 0.2%, and we're not happy with that. We can do more and we should do more. At Stairlifts, we are pleased with, and we do have a few issues in the U.K., in our direct channel there. And we relate this to be market-specific issue and not necessarily share or competitiveness.

Vehicle Accessibility, which we've been talking about over the last couple of years, has now returned to some growth. And the outlook, at least for the fourth quarter, it looks relatively good.

Patient Handling reported negative growth, as Pernilla alluded to, of 7.7%. And especially in the U.S. Institutional business, it's up to us to edge up our competitiveness and deliver well. If you look at the EBITA margin, it is down and explained by lower gross margin, as Pernilla talked about.

If we then take a step back and look at the outlook for 2019, we did guide the market in the previous report. We believe our organic growth for the second half will be lower than what we previously communicated, and what we communicated at the time was in our growth interval 4% to 6%. It will be lower. However, the adjusted EBITA margin, we still expect to increase in second half of the 2019 versus first half, which was 8.4%.

We will continue to focus in this quarter on improved customer experience and efficiency, service quality and to deliver on our innovation program. We can see what the impact a launch like 1100 is doing for, at least in this case, the Stairlifts business. And when we look at the underlying macro trends, we believe that these are very favorable for us going forward.

Before moving into the Q&A session, I will spend a few words on today's announcement under important events after the reporting period. And this is where the Board announced today the decision to initiate a strategic review with a purpose to uncover underlying values not reflected in the current share price.

The Board has appointed Rothschild as financial advisers for the strategic review, which could lead to one of the following outcomes: the divestment of 1 or more business units, potentially the entire group being acquired or some other strategic transactions; or the strategic review could also lead to the conclusion that Handicare remains in the current structure and -- as is.

I am very positive to the strategic review, and I see it as a continuation and a vehicle to accelerate the process we already started in realizing Handicare's full potential. The process starts today. I cannot comment really more on this topic until we have material new information, which will be published according to applicable regulatory procedures.

And with this, we will open up for Q&A on the Q3 report. So back to operator for the instructions for Q&A. Tom?

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Operator [5]

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Ladies and gentlemen, we'll now begin the question and answer session. (Operator Instructions) We have no questions at this time. You may continue.

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Staffan Ternström, Handicare Group AB (publ) - CEO & President [6]

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Okay. I think if there are no questions on the line, I would suggest that we close the call. I appreciate that you've been listening to us today and look forward to deliver the fourth quarter report on a similar call in February. Thank you very much, and have a good rest of the day.

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Operator [7]

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And this concludes our conference for today. Thank you all for participating. You may now disconnect.