Earnings Call: Q3 2020

Oct 23, 2020

Hi. So first of all, I would like to welcome everyone to join our first ever audio cast. So as you heard, you will be able to ask the questions at the end of the presentation. So next slide please. So today is, of course, a day for celebration in Freighter. For 30 years, we have been preaching the advantages with digital price labels, and we can now conclude that the market gets it. The demand for ESL systems is higher than ever before. We have been preparing for this day since the company was founded in 1991. It's of course with particular pride and joy we share with you the fantastic numbers for our Q3. The net sales reached a record high level of nearly DKK 566,000,000, which is an increase of 143% compared with Q3 of last year. Directly high net sales number is, of course, to a large extent enabled by the large customer projects that we have ongoing with Best Buy in the U. S. Plus retail in the Netherlands, nor is Gilpin in Norway and so on. But there was also great contribution from small and medium sized customer projects that were ongoing all around the world. Our operating profit nearly tripled compared to the same period of last year. We have previously talked about the scalability of our business model. And of course, this quarter is the proof to that. As you can imagine, delivery activity was very high in the quarter. And we are very proud of what we accomplished during these past months, particularly considering the ongoing pandemic that kept introducing new obstacles and challenges throughout the quarter. Our production has been growing at full speed, and we have shipped millions of labels to customers all around the globe. But none of this would, of course, have been possible if it weren't for all the wonderful colleagues around the world. The amount of talent, loyalty and courage throughout the entire organization is incredible. And it is true that our biggest asset is our people. And the success we share with you today is attributable to each and every one of them. And as you can imagine, there's lots of hard work behind the figures and those that should not be overlooked. Next slide please. Looking at the graph for net sales, it must be pointed out that we needed to change the scale of the graph to show this quarter. As many of you remember, we were hit by some project delays during the Q2. This was a consequence of stores not being open to receive deliveries or to manage installations due to the pandemic and the restrictions that were imposed on many stores, many retailers. We caught up with all of those these deliveries during the Q3, and we are now on track from a customer project perspective. During the spring, we launched our new cloud based platform, the Priso Plaza. And we are very pleased to announce that more than 150 stores around the world are now running on this platform. We continuously add new stores and we are beginning to migrate existing customers from on premise solutions to the cloud. Being able to provide customers the ability to manage their stores in the cloud brings many advantages. And it's everything from system integration, monitoring to upgrading and adding new functionality that is made a lot easier and more controllable. It should be noted, however, that not all retailers are looking to immediately move to the cloud. It could be due to connectivity issues or other things that make an on premise solution more attractive for them. So next slide please. So as we mentioned earlier, the market demand for ESL is very high. Our order intake of SEK440,000,000 in the 3rd quarter is almost twice the order intake for the same period of last year. As announced during the summer, we signed a contract with Canadian Tire, which is one of Canada's largest retailers, to be the exclusive ESL supplier. And although there are no minimum volume commitments in the contract, it's a very strategic and significant win for us. It was a highly competitive procurement process and the different ESL solutions were tested extensively. So Canadian Tire is the franchise organization that is represented in every major city of Canada. And as you can imagine, it requires an industrial scalability that only Chrysler can offer. It all comes down to the reliability and robustness of the optical near infrared communication protocol. And we are the sole provider of that protocol in the industry. The initial order amounted to DKK 100,000,000 and that is to be delivered during the fall and into Q1 of next year. We also announced during the summer another win with the Norgeskirken together with our Norwegian partner Strong Point. And the order value for Praetor was around DKK 65,000,000. On top of that, there was a good inflow of small and medium sized customer orders throughout the entire Q3. So despite the high invoicing activity, the backlog on September 30 was DKK754 1,000,000. The backlog is the vast majority scheduled to be delivered during the Q4, but some parts will remain for the Q1 of 2021. So next slide please. So the gross profit increased as a direct consequence of the high net sales number. From a gross margin perspective, we reached a level of 23.6% in the quarter, which is around 10 percentage points lower than the same period of last year. So if we go to the next slide please. So why gross margins are difficult to predict for an analyst is because they are the result of a large number of contributing factors. We often mention in our reports the product mix and the customer mix, but there are of course also other things such as component pricing, logistics, currency effects, etcetera, that also impact the gross margin. But looking for a minute at the product mix, this is a combination of several things. In our product range, we have different label types. We refer to them as segment based labels or graphical labels. But we also offer a wide range of label sizes, and these come with very different gross margins. A large, more signage like graphical display drives a high net sales number per unit and hence a lower gross margin, whereas a small segment based label is significantly cheaper but drives a higher gross margin percentage. So the product mix varies from quarter to quarter based on who the customer is. Typically, this is related to the retail vertical the customer is in, but there could also be other factors that contribute to or decide which type of label a customer chooses in the end. But what can be concluded is that the segment based labels, they are becoming a smaller share of the overall mix. But the percentage of net sales that's being generated from services, licenses, software subscriptions and so on also impacts the gross margin as these are these generally have a higher gross margin percentage since some of the costs are more operating expenses. So next slide please. The operating profit also caused the need to change the scale of the graph. So this is truly a remarkable quarter. While we have a good overall cost control in the company, especially during this pandemic, the level of operating profit is rather an indication of the scalability of the business model. So we need to invest in operating expenses to be present in several geographies and of course for product development and so on. But we can manage to scale to large volumes without increasing the size of our teams and our fixed costs. It should also be pointed out that Chrysler has not received any government support during the pandemic. While we have been careful with recruitments and general spending, our focus have been on building for long term growth. So next slide please. As we always say and remind, cash flow should be analyzed over time as it is the result of various balances at the very last day of the quarter. So we tie capital in customer receivables, and that's for deliveries performed in the 3rd quarter. So the higher the more deliveries, the higher the customer receivable. And of course, the inventory level reflects the order backlog and the preparation to make deliveries during the Q4. So as a result of some negotiations with regards to payment terms on large relating to the large customer projects, we have managed some favorable temporary payment terms, which also supports our working capital at the end of the 3rd quarter. So next slide please. So looking at the financials for the 1st 3 quarters of 2020, we can conclude that we have a large growth numbers also here. So net sales have increased by 41% and operating profit by 12% compared with the same period of last year. Order intake has increased by 72%, which is again a good indication of the increased market demand. Growth is primarily attributable to the large customer contracts we have signed this year, but it is worth noting that we are seeing good growth in many countries around the world. In 2019, just to remind everyone, the net sales for the full year was just over SEK 1,000,000,000. Next slide please. We have continued to build our presence in the market. Recently, we have expanded our direct presence into the Netherlands and Taiwan. We have also strengthened our presence in other strategic markets, particularly to focus on the Tier 2 and Tier 3 customer segments with adding feed sales capabilities. So we have developed a competitive turnkey offering that we believe will be particularly interesting for small and medium sized customers that do not have all the capabilities in house to manage an ESL deployment. And although there are other companies more severely affected by the pandemic than prices, it should be pointed out that in certain areas such as the logistics, we face continuous challenges as the conditions changes frequently. The next slide please. So finally, looking at the market development and market dynamics, we see high activity in most markets and in all retail verticals that we address. And those are typically grocery, do it yourself, pharmacies and consumer electronics. We did see an increased activity also prior to the pandemic, but it can be concluded that the need for automation and in store digitalization is accelerating following COVID-nineteen. We are noting some trends that impact the demand for ESL systems. So it's the increase of e commerce that is transforming retail. It's the need to reduce human contact points in the physical store. And it's the challenges to stop stores, which drives the need for profit efficiency. So when it comes to e commerce, it's as much about the changed shopper behavior and expectation on the shopping experience as it is about the actual need to fulfill and deliver online orders. And following the COVID pandemic, retailers are challenged with a new health and safety regulation. It is intended to create an environment that attracts consumers and staff back to the physical stores. So investing in systems and tools for automation is an important aspect of reducing the contact between store employees and shoppers in the stores. And for many reasons, it has been difficult for retailers to staff their stores during the pandemic. So sick leave are at record high levels and utilizing temporary staffing has been a necessity for many retailers to remain open. So this drives the need for tools and processes that enables flexibility in staff allocation between staffs and that reduces the time for onboarding of new staffs. So to conclude, we have a very strong quarter behind us, and we have a very high order backlog that we bring with us into the 4th quarter. And the market activity continues to be high and the need for in store digitization is higher than ever. But our ambition is to continue to build the organization and our product offering to support continued growth for many years to come. And with that, I'd like to open up for questions. And our first question comes from the line of Simon Granat of ABG. Please go ahead. Your line is now open. Good afternoon, Helena, and congrats on the strong numbers. Obviously, your order intake is very impressive in this quarter, which I interpret is partly driven by a pent up demand from Q2. And my question is whether you think that this pent up demand was materialized in Q3? Or could we also expect similar effects as we enter Q4 here? We don't comment so much on what we can expect for the future, But we do see a high general demand in many geographies, let's say. So it's the effective customer dialogues haven't been so affected as one would imagine following the pandemic. So anyone that has had an ongoing test or a project, that has kept going. So there isn't really it didn't sort of come to a halt in Q2 and then sort of opened up the floodgates in Q3. It has been more steady. We experienced the customer activity more steady over this entire period. Okay. That sounds good. And as a follow-up question, if I may. I found it interesting that you mentioned in the report that procurements are getting more and more complex. And I would assume that, that improves your value proposition given your large size. So therefore, my question is whether you think that you have gained market shares in recent time and also what you think around market shares going forward? When it comes to market share, it's difficult from the point of view that very few companies in this industry publish any numbers. So from it's difficult to confirm the actual amounts that are being spent and by that to calculate a true market share. But of course, we have won some significant contracts during this year. And with that, it can be assumed that we have taken a greater portion of the market than perhaps in 2019. And when it comes to okay, so let's take the other if it was a question or to comment on the other, on the procurement processes. So basically, what we are seeing, and we have been talking about this for some time, is as the ESL system is touching on more in store processes than only the price update, so replenishment, click and collect, inventory management and so on. The tool the system is becoming more strategic and more complex in its integration. And hence, many retailers want to have the same processes in all of their stores throughout the chain. And so what we see is more and more full chain adoption. And of course, this leads to higher amount, larger size investments. And that we have also seen proof of during this year. And with that, the testing and the complexity of the entire procurement process increases. But at the same time, as we also mentioned in the report, once you start working with a customer and you work with the full chain, it also opens up the possibility for other dialogues, more mutual product development and also much easier dialogue around introducing new functionality and so on in the system. So while it's more challenging during the procurement process, let's say, there are also benefits once you start working with the retailer and deploy the food chain. I'm not sure if that answered your question, Simone, but I thank you very much, Dimso. I'll leave I'll go back into the queue and let someone else ask some questions. And so thank you for that. And once again, congrats on the strong numbers. Thanks, Simon. There are currently no further questions. I will now give the line back to Simon Granat from ABG for his follow-up question. Yes. So just as a final question. Thank you. You mentioned that you have strengthened your focus on Tier 2 and 3 customers. Could you elaborate a little bit about what this relates to and who these types of customers are? Yes. So this when we talk about the this would refer to small and medium sized customer projects. So we have been engaging in the French market for quite some time with field sales activities. And basically, what that means is that we are addressing individual stores. And those could be franchised stores that are organized under an umbrella, but more free to decide on their own investments. But it could also be on more stand alone smaller chains or individual stores. But that is a typical sort of field sales work. And what we see there is that they typically have a greater need for a turnkey solution. And when we what do we mean with a turnkey solution? Well, what we do sell an ESL system. And of course, that comes with the hardware and the software and the system integration and all the rest of it. But there are many more things that are needed in order to get a system up and running in a store. So first of all, you need to change all the rails and attachments. So all the plastics in the store must be changed. The infrastructure must be mounted as an installation project. And all of this, of course, must be project managed in order for it be successful. So these are services that we have been working with in France for some time. In many, many countries where we operate, this is work done by our resellers. But then there are certain markets where we are now introducing to offer that kind of service ourselves. And that's a very interesting market because it sort of penetrates the market on a different level than just going through the Tier 1. If we look at a typical Tier 1, they tend to have very large IT department. They tend to have a project management team. They have their own installation teams and so on. So where we work with Tier 1 customers, for the most part, we provide the ESL system and they take care of the services surrounding. It happens that Tier 1s do purchase turnkey solutions. But in order for us to grow the service side of our business, it's really the field sales, the Tier 2s, the Tier 3s and also the individual stores that we need to go after. Okay. I think that was crystal clear. Thank you for that. Thanks, Timon. Simon. Thank you. Teleconference. I will now hand back to Helena for any further comments. Okay. Then well, feel free to contact myself or Susan if you have any additional questions on our Q3 numbers. And otherwise, we look forward to speaking to you again when we release the Q4 results, which will be in February of 2021. So thank you very much for joining and listening in, and have a good rest of the day.