Earnings Call: Q3 2021

Oct 22, 2021

Hello, and welcome to the Prysor AP Audiocast with Teleconference Q3 2021. Throughout the call, all participants will be in a listen only mode and afterwards there will be a question and answer session. Today, I'm pleased to present CEO, Helene Hollenklein. Please begin your meeting. Okay. Thank you. So hi, everyone, and welcome to this presentation with a special focus on the financial results for Q3. Before we get started, I'd like to welcome Susanna Sutilius, our new CFO, who joined us end of August. So I will be hosting this presentation today. But if you have any follow-up questions on the financials, then you're more than welcome to contact Susanna directly. So let's skip the first slide and start off with Some of the trends we are noticing in the market on Page 3. So we can conclude that the growth in e commerce Continues to be a very big topic, particularly when it comes to fulfillment methods of e commerce orders. There are lots of different models being explored around the world. So we see everything from picking in stores, Automated fulfillment centers, various forms of dark stores and micro fulfillment centers within existing stores. And so far, there is no obvious winning strategy yet. But as always, when there's exploration and new business opportunities, It also opens up for new players to fight for share in the market. So in Sweden, for example, we have examples like For Dora market that is entering the grocery scene and there are, of course, numerous similar initiatives around the world. And particularly considering that the last mile delivery of an online order is the most challenging and costly, we expect to see more of this type of exploration going on. And on the opposite side of the same coin, we see brick and mortar retailers putting lots So providing a more personalized Experience in the stores seems to be a very popular theme for retailers and particularly within the grocery segment. But however, in order to be more personal, they need more data and more analytics to understand behaviors and expectations of shoppers. And they do need it real time when the shopper is physically in the store. And the increased need for data, it goes hand in hand with the changed Consumer and the consumer behavior and the effect of e commerce on what is today perceived as a good shopping experience. So shoppers today are much more sensitive towards price mismatches between sales channels, And they expect more service and more guidance to support their buying decisions. And living up to these expectations Are not easy in an analog brick and mortar environment, which is, of course, pushing the adoption of technology and digitalization. And adding to this, we can also conclude that several countries feel real challenges in Finding personnel for their stores, which in combination with increased labor costs are major drivers towards more automation in the stores. And last but not least, we have the point of sustainability. So shoppers today expect retailers to ensure waste is kept to a minimum and that locally sourced products are available on the shelf. And since consumer loyalty is one of the key ingredients to being a Successful retailers, this has put sustainability very high on the agenda of retailers. And as you can see, the underlying trend Toward continued automation and digitalization, they remain very strong and we firmly believe that the adoption of digital labels will accelerate. So moving on to the next slide. So looking at the financial results for the period of January to September, we note a growth of 18% in net sales year over year. The distribution between quarters has been somewhat Different compared to last year. In Q2 2020, we saw pandemic related delays in deliveries as stores were closed. But in this year, we had a more even distribution between the quarters, although with some acceleration in delivery volumes during the Q3. And operating Profit is slightly lower than last year. And aside from negative currency effects, we have cost increases for components and freight that put pressure on our profitability. The next slide please. So if we look at the geographical distribution of net sales, it is somewhat similar to last year, but with the growth being seen in Europe and the Asia Pacific region. And moving on to Slide 6, please. So digging into some of the market highlights from the 3rd quarter, I'm pleased to inform that the large customer project in the U. S. Is nearly completed. And this means that we now have a chain wide deployment With almost 1,000 stores deployed across the U. S. And that shoppers in every state of the U. S. Get to enjoy our solution when they do their electronics shopping. We are also pleased to report a very strong momentum in Canada. We have delivered large volumes of labels to be installed in several major retailers in Canada. And as the penetration rate Of ESL is increasing rapidly. The market is really taking off and the interest in ESL in Canada is higher than ever. There is also a continued high activity level in France. And France is the country with the highest penetration rate of ESLs in the world. And despite that, it continues to be a very strong market with a good mix of new and existing customers. And in more mature markets like France, we see continuous cycles of Upgrade projects with existing customers, which provide a solid foundation year after year. It's almost unheard of that a retailer that has invested in digital labels go back to paper labels. So we can expect more replacement cycles going forward and this being a bigger part of our Recurring business as time goes by. And although we have a very good relationship with Carrefour And that we continue to expand our use cases together. There is a delay in the French ESL rollout. So we have extensive pilot programs ongoing in Castor outside of France, but for reasons not relating to prices, the upgrade program in France has been delayed. We'd also like to mention Italy as an increasingly interesting market for us. For several years, there have been government sponsored tax subsidies on technology investments, which have benefited the adoption rate of ESL. The subsidies are decided from 1 year to the next, and that, of course, has caused some vulnerability in the market. But as the penetration rate reaches a certain level, it becomes very challenging for retailers to compete unless they have similar capabilities to change prices and work more efficiently. And so just like we see in Canada, We believe that Italy has reached the tipping point where the tax subsidy, in fact, Because less important for the continued strength in the market. So moving to the next slide please, page 7. So looking at the financial results for the Q3, we can conclude that the performance is strong, but that comes from last year of EBITDA. We have a high delivery activity in the quarter, taking up to net sales of nearly SEK 500,000,000. And however, as we see pressure from currency effects as well as cost increases in supply chain and freight, We do not reach the level of profitability of last year. Next slide please. So the order intake of SEK 307,000,000 is based on A stable run rate of small and medium sized orders. Although it doesn't fully reflect the level of activity we see in the market, It's well distributed across customers and geographies. And we have mentioned before that the timing of large customer orders will continue to cause some fluctuation in our order intake between quarters. It's more interesting to look at the development over time, Which continues to support the puts we see in the market. Next slide please. So we had a large backlog with us from Q2 and we are pleased that we have been able to catch up on some of that backlog during the Q3. Lead times are much longer than normal, and we have been working hard with our supply chain and logistics to get products to our customers around the world. And although backlog remain on the high side, also at the end of the Q3, we feel that we are now back to a steady flow of products and deliveries. The next slide please. From a gross margin perspective, we see some significant pressure from various cost increases. There is a component shortage in the world and the unpredictable lead times that drive an increased need to source on the spot markets at higher prices to keep production going. And aside from that, several of our standard components, like for example, the ASIC, have also increased dramatically in price. And this is, of course, due to the shortage in semiconductors. And adding to that, we also have a higher freight cost than normal, which is a direct consequence of the global transportation crisis. All of these increases are somewhat temporary. But based on what we hear from our suppliers, we predict That we will continue to see some high cost levels also going into 2022. The next slide please, Page 11. And operating profit is, of course, a result of the Gross profit less the operating expenses. And as we gave proof of last year, we have a highly scalable model where we can support large customer projects and large delivery volumes without adding much cost. However, as we continue to Invest in our market presence and product development to support further growth, we do have a higher cost structure this year than last. Our sales cycles are very long, typically more than a year, which means that business development efforts that we invest in today I like it to be improved in the coming years. And so supported by strong macro trends towards digitalization and Retail Automation. I believe that price is well positioned for further growth. And in addition to providing the best performing eoscent system, we We will continue to develop price of plasma and adjacent capabilities to support data collection and data analytics. And with this, we intend to strengthen our competitive position further with the ambition, of course, to also increase our recurring revenues over time. Page 10. So in the beginning of 2021, we noted a significant extension of lead times. Transportation times from Asia increased by several weeks to Europe and North America. And backlog was building up and customers were frustrated to not get deliveries. So we have worked very hard to get back on track with shorter lead times, but this also means building more inventory and increasing the capital tie up. So to manage this temporary situation, we have increased our credit facility with the bank to SEK 200,000,000 from October. And as the global freight situation returns to normal, we also expect our balance sheet KPIs to come back to more normal levels. Next slide please. So a quick recap of the 3rd quarter. So we continue to so we do feel a continued strength in the market and the market trends driving The need for increased automation and digitalization continue to accelerate. We have a stable run rate business with good distribution across customers and geographies and large customer projects would come on top of run rates, but not in an even flow and hence some continued fluctuation between quarters. Our production is going at high speed and we keep a good delivery pace to our customers. We feel well positioned to meet an increased need for data and analytics in brick and mortar retail. With Priceoplaza and our shelf mounted camera, We look forward to engaging more with customers and ecosystem partners on this topic going forward. And we announced last week the decision to add production capabilities in Europe. We believe that this will improve our competitive particularly in the European markets as we will be able to offer customers shorter lead times, More customization, while at the same time reducing our carbon footprint. So moving production closer to our customers It's been a strategic ambition for some time, and it's thanks to the design of our new labels that we can increase the degree of automation To the extent that this becomes financially viable and being able to mitigate geopolitical risks and reducing our dependencies on Asian production is something we are very proud of. So with that, I'd like to conclude the presentation and open up for questions. Thank you. 21. There will just be a brief pause for any questions are being registered. We have a question from the line of Sebastian Royce from Quiro. Please go ahead. Sebastian, if your line is on mute, can you please unmute yourself? Yes, sorry. Thank you very much for your presentation. Two questions on my side. First, maybe could you remind us the number of pilot Projects you may currently have and where are they? And second question is about your inventories, which has increased Significantly in Q3, you explained during the presentation that you are building inventories for shorter lead times. But Could you give us more color and also explain what kind of inventory is it? Thank you. Yes. Hi, Sebastian. So on the pilot projects, we never comment on ongoing Customer dialogues, let's say. But as always, we run multiple pilot programs in all geographies, in fact. Very few retailers would invest in a new technology like ESL unless they have started with a pilot project On pilot program. So that is a part of our, let's say, recurring or ongoing sales cycle. We also run pilot projects on expanding use cases, and that is also a very interesting area. So that would be pilot programs with Existing customers that intend to further explore the value creation from their ESL systems. When it comes to inventories, it's primarily on the label side. So we do have a, let's say, a significant extension of lead times. And so the what happens is that we are having inventory as, let's say, goods in transit. So they are not sitting in a warehouse, But they are somewhere on the boat or waiting for a plane To be brought to the customer and that's in fact where most of the capital is being tied up. So it's on label side. It's, of course, to manage deliveries on the backlog, but also on the, let's say, the run rate business to make sure that there is that we can keep lead times to somewhat decent level. I hope that answers your question. Yes. Thank you. And some interesting points you mentioned in the presentation is that So your customer is using more and more ESL with new functionalities like the blink Yes. Other things, maybe could you help us understand for the moment the proportion of your Customers that use Blink and other interesting features and how do you think it will evolve in the future? So what we are seeing is that more and more customers are utilizing the flashing capability in the label to address in store process efficiency. And that would be for replenishment, Click and Connect, the pick to light for increasing the speed of picking online orders. We also see an increased utilization of the product location capability in our system. And this is, of course, a very interesting data point, not only to support in store efficiency, But also to enable other programs to or other analytic capabilities basically to utilize This information. So for a retailer to know where the shoppers are and then being able to match That with the where the products are located, that provides them new and very important data points. So while Pfizer is not providing information on where the shopper is located necessarily, we do have unique capability to tell the retailers where the products are located. And that we do by understanding where the label is located in the store. And that way, we can map out the real planogram of the source. And we see a huge interest for these data points with many retailers around the world. Thank you very much. And as there are no further audio questions, I'll hand it back to you, Helene. Okay. So thank you very much for listening in. If you have more questions, then feel free to reach out to Susana or myself. If not, I look forward to speaking to you in a few months again. Thank you. Bye. This concludes our conference call. Thank you all for attending. You may now disconnect your lines.