Dynavox Group AB (publ) (DYVOX) Earnings Call Transcript & Summary

Okay. Good morning, everyone, and welcome to this Earnings Call where we will cover the Second Quarter 2022 and summarizing our business in the month of April, May and June for Tobii Dynavox. I'm Fredrik Ruben and move to next slide. I'm the CEO of Tobii Dynavox.

And I'm Linda Tybring, I'm the CFO, Tobii Dynavox.

And in this call, we will cover the second quarter of 2022. But first, we'll take you some brief fundamentals about the company, to summarize the main takeaways from the quarter. We will obviously dive deeper into the financials. And thereafter, there will be a Q&A session. We have received questions prior to the call. You can also submit questions through e-mail to Linda's email, which you can see on the slide here. All right. But again, before digging deeper into the financials of the second quarter, I'd like to make a summary of what Tobii Dynavox is about? First and foremost, and this is important for not only us but also investors and the ecosystems of in partner around us is to reiterate our mission, which leads to empower people with disabilities to do what they once did or never thought possible. And this mission statement summarizes 2 main user stories. The, do what you once did, that may be the person who led a normal life until a diagnosis such as ALS, which rendered her unable to control her body and limbs or communicate like before. The other story is the never thought possible. That's the child that is being diagnosed at an early age with the conditions such as autism, cerebral palsy, where thanks to our solutions. She can do much more than the world around her ever thought possible. And on the picture here, you see Delaina Parrish from Florida. She was born with cerebral palsy, and she's a great example of exactly this. The market that Tobii Dynavox serves is hugely underserved. Some 50 million people on the face of this earth have a condition so grave. They simply cannot communicate unless they have a solution like ours. Every year, some 2 million people are being diagnosed, but only about 2% of them are actually being helped and the rest remain silent. The main reasons for this bells lack of awareness, also among the professionals, the prescribers, but also poor healthcare and reimbursement systems in most countries in the world. We operate with a global footprint. Today, some 3/4 of our business stands out of the U.S. and North America and largely because of a reasonably well functioning and established funding system, which was founded some 20 years ago. Our products are sold in some 65 markets around the world. Our staff is distributed in a similar way as the revenue, meaning that some 75% of our staff are also based in North America with our U.S. headquarters in Pittsburgh, Pennsylvania. Our second largest office is our headquarter here in Danderyd outside of Stockholm, but we also have branch offices in several European countries as well as in Suzhou in China. At this point, we employ a total of roughly 550 employees. With the recent acquisitions, which we'll talk a little bit more about, we have also established or increased our presence, specifically in Belgium, France, Ireland and Denmark, in addition to a smaller number of remote employees, primarily in Central Europe. Tobii Dynavox provides a comprehensive portfolio of solutions. And if you look at this picture from left to right, we start with the content where Tobii Dynavox has the leading library of communication symbols, but also synthetic voices. Specifically, the voices is a new component that we now have in-house through the acquisition of Acapela Group. If we then move to the right, we take this content and develop a highly sophisticated communication software tailored to the type of users and during the quarter that has passed, we have both expanded the number of languages in our symbol communication software called TD Snap, but also enhanced our software for literate users in the software TD Talk, and we will also cover that a little bit more in detail. We then build the devices with cutting-edge technology. They are typically medically certified including communication aids that can be controlled using your eyes. And then we have a comprehensive services portfolio to help our users through the very often complex journey of obtaining a device and getting it prescribed. And last but not least, we are there to help our users, therapists, caregivers, et cetera, with a worldwide support network. Tobii Dynavox's go-to-market model is predominantly as prescribed its some 90% of our revenue comes from some sort of public or private insurance provider. And this also means that we have solid paying customers, and we are quite resilient towards changes in the overall economic climate. In addition to that, our market is extremely underpenetrated. So there was a quick recap about Tobii Dynavox, and now we will go back and focus on the past 3 months. If I start with some of the highlights of the quarter, we saw a very strong and solid sales growth in the quarter. In total, our revenue grew by a staggering 75% compared to the same quarter 2021. However, this comparison must be seen in the light of a rather problematic Q2 last year. We had severe supply chain disruptions and last year, and we also now have favorable currency impact. But still, if we adjust for both currency and last year's backlog effects, the underlying revenue growth was a solid 23%. We saw growth in all major regions, but in particular, our North American region was the clear locomotive for this quarter. One of the reasons is that we see a faster pickup from the pandemic in the U.S. compared to Europe, mainly due to longer lead times from assessment to prescription and funding and delivery in non-U.S. markets. In the same way, we saw that the first quarter, our margins were heavily impacted by the abnormally high component and freight charges. These are burdensome, but also largely of a temporary nature, while we feel that this is less concerning long-term. In June, we also launched a very important product launch around the concept of voice banking, which essentially means that with the use of Acapela's artificial intelligence solutions, we can offer a user to make a recording of your own voice and thereby create a synthetic version of that person's own voice, which is then being used in our leading communication software for literate users, TD Talk, a common user group for this use case are people diagnosed with ALS, who eventually in many cases, lose their own voice as the condition progresses. We've also been very active in -- on the M&A field. We have closed 2 acquisitions in the quarter that was first the Belgian Acapela Group and then Irish Safe Care Technologies. But we also announced a deal where we acquired all the assets and operations from our Danish reseller ASK, and that deal was then eventually closed on 1 of July. These 3 acquisitions shares some varying rationale. So one of our objectives is to grow or complement our product portfolio towards the existing markets that we serve. The acquisition of Acapela is a great example of where we bring a solution that is closely tied and integrate to our offering naming the synthetic voices and thus enable our teams to work much closer and innovate at a much faster pace. It's also a great company with very solid financials, hence, also adding to our overall critical mass and financials. So that's one type. The other type or the other objective is to grow our geographic reach and to come closer to the prescribers, the users and the legislators in specific markets and regions and in some cases, when we have seen that removing that one layer enables us to better serve the local market. The acquisitions of both Safe Care Technologies in Ireland and ASK in Denmark are 2 good examples of such. And if I look back into the history of Tobii Dynavox, our entry into our currently largest market and best-performing market in this quarter, the U.S., that actually stands out of 2 acquisitions made a number of years ago. It is, however, important to note that acquisitions should only be seen as a sprinkle on the cake or such in our future growth, which is largely based on organic growth and a much improved penetration of this hugely underserved market. With that said, I'd like to hand over the microphone to Linda for a moment to talk us through the financials.

Thank you, Fredrik. So as Fredrik already mentioned, revenue for the quarter came in at SEK 288 million, it's a 75% year-on-year growth. Currency impacted positively with around 20% and organic growth was 48%. M&A contributed with almost 6%. It is, however, super important to have in mind that last year, we had a very high backlog. And with backlog wins, orders not shipped, due to the supply problems. Main part of this backlog was shipped in Q3 2021. But if we adjust for last year's numbers, with the backlog occurred in the quarter, our underlying organic growth is still about 23%. This means also that Q3 of last year more than 20% of our revenue was related to the backlog coming from Q2. This becomes very clear if you look at the dotted red lines in the screen. The gross margin -- sorry, I would also mention that North America, we had a strong growth and really start to see business picking up in the other markets as well. But the rest of the market will have -- are growing, but we see our sales cycle is a bit longer, and we hope, therefore, to see sales pick up more in the coming quarters. Gross margin of 64% remained at the same level as last quarter. But as prior quarters still impacted negatively by the one-timers, but mainly impacted by the increased cost of components and freight related to pandemic, but also the situation in the world. Freight cost has continued to be more than double versus prior year. If we adjust for temporary effects, our underlying gross margin was almost 66%, or which would have meant some SEK 3 million to SEK 4 million in improved EBIT. Since we now have a high level of inventory, the positive signs that we see in the supply chain and on components will not have an impact on the gross margin most likely this year. At the same time, we see a clear improvement on our component supply and costs coming forward. So looking at the EBIT for the quarter, it was SEK 16 million and 6%, a significant improvement versus prior year. But last year's number was impacted by the push revenue from Q2 to Q3 that we just talked about on the revenue side. Our OpEx increased organically with around 15% versus prior year. The prior year had artificially low cost related to pandemic within travel and we didn't have that many events. But we also increased costs related to being a standalone company. But this is also important and that this is in line with our expectations. We also see higher salaries, but as many other companies, we have been a bit challenged with recruitment and therefore, we have to bring in more interim consultants short-term. We expect this to continue the coming quarter. We are also starting to strengthen our organization, specifically adding more resources into sales and marketing to continue our growth journey. As we have mentioned earlier, we need to be more feet on the ground to be able to grow. So the net effect on R&D spend increased with SEK 8 million, mainly driven by increased depreciation related to major product launches during both end of 2021, but also beginning of 2022, but it also relates to that we have acquired technology there from already mentioned M&As. EBIT ended up at 6%. We got some tailwinds from currency but negatively impacted by components, freight, depreciation and some M&A onetime costs. So talking about the balance sheet and cash flow. Cash flow after continuous investment was minus SEK 27 million. The negative effect that we have in the working capital is mainly driven by the increased inventory levels to secure a continued low predictability in supply chain, but also sales starting to pick up, so we see a higher outstanding receivables. As we said last quarter, it is a cautious decision to increase inventory levels given the uncertainty in the global supply chain. At the same time, we now fill more at ease with our ability to deliver and need orders going forward. This will start to balance out going forward. Cash at hand ended up at SEK 160 million. Net debt was SEK 553 million. During the quarter, we closed the 2 acquisitions and paid this in cash of SEK 107 million. To finance part of this, we have used our revolving credit facility and lend additionally SEK 54 million. And net debt of last 12 months EBITDA was 2.9x. This is within our target spend, but also note that if we would add our acquired companies last 12 months EBITDA, net leverage would be around 2.7x. So back to you to conclude today's earnings call, Fredrik.

Great. Thanks, Linda. So before we open up for questions, I'd like to reiterate some of the main takeaways for the second quarter of 2022. We saw very strong sales development, a 75% year-on-year growth, but it's important to note that the year-on-year comparison is affected by last year's supply disruptions. But however, if we also adjust for that, the underlying growth was a solid 23%. We had a clear rebound from the pandemic and in Q2 2021 -- and compared to Q2 2021. And in particular, North America is the locomotive in this quarter. We experienced continued extreme surge charges on select components and freight. We have built up solid inventory levels to secure undisrupted deliveries, but also this has happened at quite high costs. We see clear signs of normalizing component costs, but this will take time. We closed and announced no less than 3 strategic acquisitions during the quarter. And in these uncertain times, I would like to reiterate the fact that the overall economic climate has no or little impact to our business, since our products are prescribed. And in addition to that, the market is significantly underpenetrated. If anything, an economic downturn would, to some degree, help us when it comes to attracting top talent, which is important for our growth. So based on this, we see no change in our outlook or long-term financial targets. And to reiterate our long-term financial targets, which for clarity has the time horizon of 2 to 3 years. Over time, we aim to maintain an annual growth in excess of 10% adjusted for currencies. Here, we clearly over performed this quarter. We want to reach and maintain an EBIT margin of 15% or more. We still have some way to go there. But with the normalized gross margin, the anticipated economies of scale we have in our model, we remain confident that this is the level we should reach and maintain long-term. We want to maintain net debt ratio over the last 12 months EBITDA of 2x to 3x. The absolute outcome was 2.9x, which means we are within that range. And specifically, if you add the run rate of the newly made acquisitions, it was more like 2.7x. And once we have landed in our recent split from Tobii, we have built up our balance sheet and the likes, dividends will happen, provided other more compelling alternatives, such as M&A take preference. With that said, I'd like to invite Christian Hall to the call and for you to run us through the questions that have popped in from the audience.

Okay. So just let me remind you that you can e-mail questions to the address that we said. So now the first question is regarding your revenues in the quarter and regarding Europe and the rest of the world outside of North America, first of all. So how did the aftermath of the pandemic impact you more specifically? And what were the specific hampering factors? And when do you expect Europe and the rest of the world outside North America to be back on a more normalized revenue level and growth rates?

Sure. So again, if we look at the audience we're serving, that's people with disabilities, which by definition almost has been seen as risk groups in the pandemic. physical meetings is for certain user groups quite important, specifically if you think about children with autism or other intellectual disabilities, where a Zoom call or the like doesn't really make it. So our ability to simply meet with our users and our prescribers' ability to meet with their patients has been quite hampered. This was a factor of the pandemic and which was, of course, mitigated with various kinds of quite often innovative solutions, but of course, digital meetings. When the pandemic started to wind down, we also saw exactly the trend that we were anticipating. This meeting started to happen. We see that North America is ahead of the curve, the societies seem to have opened up slightly faster. And specifically, during this quarter, we have seen a significant uptick among the user groups of children with autism, which again speaks exactly to the thinking we had before. The reason why we don't see that the rest of the world is picking up as fast is simply because in many countries outside of the U.S., the process from doing an assessment, getting a prescription, getting through the funding system and eventually getting the price is simply longer. We estimate that to be around 6 to 12 months. And if you then think about the last wave of the pandemic was over sometime in March, where we can do the mathematics that is probably going to take somewhere into the early forward before we see some sort of catch-up effect. But it's important to say we see growth pretty much in every user group, every device category in every market.

And regarding North America and the sales and marketing there, is it completely normalized now? Or do you still see room for a potential for improvement in terms of the negative impact from the pandemic?

I -- we feel that we still have a fairly big pent-up demand that hasn't been served. And that's a demand that has, of course, grown during the course of the pandemic. But remember, our market also continues to grow throughout. So I don't believe we have a fully normalized situation in the U.S. I don't think we will come back to operating the way we did 2 or 3 years ago. But we're still -- we definitely still have both a pent-up demand and some more juice to squeeze out of the North American market.

Okay. So we have a couple of questions from Donahue from Handelsbanken here. Now the first one, was the 23% underlying growth measured at constant currencies?

Yes. So FX adjusted.

Yes. And the SEK 2 million EBIT and SEK 10 million revenue in Acapela, that's the contribution that is shown for the quarter for Acapela, is this a good proxy going forward as well?

Yes, as we have said that they have tracked about 10% EBIT, and this is what we expect going forward as well.

Okay. Now about the gross margin, when do you expect the gross margin to reach? When is it reasonable to believe that the gross margin could reach more normal levels?

I mean we start to see, as I mentioned already, that the component cost is actually coming down and we don't have that type of surcharges any longer. But due to the inventory levels that we have now, we still live with that cost for the coming year, we expect. But we start to see an improvement most likely beginning of next year. When it comes to freight, that's probably it's going to take longer. It depends on the world around us.

We should, however, note that we have other means to improve the gross margin. One such thing is, of course, that as everyone else, the cost or the prices for our products will start to come up also in some of the regulated markets. And we have other initiatives such as -- with a more predictable supply chain, we don't have to use as expensive right methods, including doing surface shipping or such of our products.

Okay. And regarding the EBIT margin, obviously, there is a big step from the 6% this quarter up to 15%, if you could please be a bit more specific on the main drivers to reach 15%. Obviously, scalability is one, but -- and what is the reasonable time frame to reach 15%.

To reiterate what Fredrik said, our financial -- long-term financial targets are spend over 2 to 3 years. And this will gradually improve over that time period. There are a couple of things that will happen over time. And the first thing we already mentioned that is gross margin, we will be able to even though moderate, improve our prices to our users, but we will also get rid of the freight cost and the component level that we have had now for the past quarters. We also will have a more normalized OpEx, and that is related to the separation. I mean we've added some costs in conjunction with the separation, but that will not continue to grow. So it is still according to our expectations that the OpEx related to the separation. And then, of course, we have -- we will be able to further grow and we have some scalability in our -- some of the fixed costs that we have. So that will help us get there.

And I think it's also important to note that this is -- the levels that we're performing at, is exactly according to plan. There is no surprise or kind of disappointment in that. We, of course, would like to see the gross margins to be better, et cetera. But this is according to the plan. And we also have to understand that if you look back a few years, we have been operating at a 15%-plus EBIT margin and nothing fundamentally has changed. We're selling with the same go-to-market model, we have the same type of customers, same type of products. So there is no fundamental change in our entire business operation that would prevent us to reach those levels.

Okay. Then we have a question regarding TD Pilot, the product that you launched in November, I think it was, how did it impact sales in the second quarter? And what is a reasonable time frame to expect full revenue impact from it?

Yes. So the TD Pilot is an eye-controlled communication aid, quite similar to the I-Series that you saw on the picture of the Delaina Parrish, et cetera. But unlike the I-Series, the TD Pilot is based on Apple's operating system, iPad OS and hence, the familiarity with that environment, et cetera. But it's still a medically certified prescribed product, which is sold at the same time of price points as previous models. There is market reception for the TD Pilot is very positive. It just works. It's probably one of the most common feedback we get a check for yourself on social media or the likes. The TD Pilot, however, as being a prescribed product also comes with a delay of the product cannot be assessed and tried out on the patient until it's actually physically delivered. And then you start the funding process. And in some markets, it actually needs to be added to tenders, et cetera. So there is a 6 to 8 to depending on which market -- month delay before it actually starts to ship. Those ones have fast now. And we definitely see exactly the trend that we anticipated that the TD Pilot is gaining quite a lot of momentum. And we are confident still, as we said since the launch is tried that this will be one of the main contributors to our growth going forward. So all good, but the dynamics of the market makes it less instant.

And regarding M&A and the pipeline for M&A, is there is something you can say about the pipeline regarding future M&As?

It's important again, M&A is sprinkle on the cake. The 2 main scenarios is either to add or complement our existing portfolio, similar to what we did with the acquisition of the synthetic voice company, Acapela, or to improve our reach -- our actual geographic reach into certain markets, but it will be a sprinkle on the cake. So we will have gradual and, I would say, sporadic acquisitions, and they're typically not massive in terms of size. We have constant discussions. And obviously, with a more active M&A agenda, which we have proven in the quarter, there is more inbounds starting to happen. But we shouldn't see Tobii Dynavox as an M&A engine and the types of acquisitions that we've seen now is probably a high level of activity compared to what we can expect going forward.

Okay. That was the final question.

Great. All right. Thank you, everyone, for having dialed into this call. Again, this recording will be available on our investor website. We are always there to answer questions. So don't hesitate to reach out. And with that, for those of you who are enjoying the summary weather outside, please go back and do that. And for the rest of us, see you in one quarter.

Thank you.

Thank you.