Invisio AB (publ) (IVSO) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the presentation of INVISIO Q4 and Full Year Report 2019. [Operator Instructions] Also I must advise that this call is being recorded today, Friday, the 14th of February 2020. And without any further delay, I would now like to hand over the call to your speaker today, Lars Højgård Hansen. Thank you. Please go ahead.

Thank you very much, and good morning, everyone. Welcome to our update for Q4 and full year 2019. As you have seen, we experienced a very strong close to the year, and in total it was a successful year for INVISIO. In the early part of January, we announced that our sales and profit for the year's last quarter substantially exceeded market expectations. So the numbers have been known to some degree for a while. And it was indeed a very strong quarter. On the numbers, Page 4, you will see that our revenue in the quarter was the highest ever in the history of the company. We exceeded SEK 200 million in revenue, as -- it was SEK 95 million last year. And for the full year, we exceeded SEK 500 million, we ended at SEK 514 million for the year, which was 40% up compared to last year. Now when looking at those numbers, you have to remember, though, that 2018 was pretty flat in terms of sales development. So to some extent, we have been catching up during 2019. We also saw a very strong order intake during the quarter. It came all the way up to SEK 269 million, which is also one of the best quarters ever. We historically have normally not seen a lot of seasonal buying, but I think that in 2019, there were some end-of-year purchases that helped the order intake go to this high level. Now in gross margin, we were also quite high in Q4, 61.4% and 61% for the full year. And our operating profit for the quarter was SEK 73.5 million. It was SEK 20.6 million last year and SEK 132.6 million for the full year, almost double from last year. So all in all, very strong numbers. But again, given our flat development in 2018, there was a little bit of catching up. It is also noteworthy that the ability to deliver SEK 200 million in a single quarter is, again, related back to what we have said many times that we have a supply chain that is able to handle large fluctuations between quarters. And also due to the fact that we, for many quarters, have had a substantial stock of products, gives us the ability to react fairly quickly and deliver on orders that have short lead times. During the quarter, there was a number of positive business developments, a new customer -- or a customer, sorry, within the American Department of Defense renewed an agreement with us. We got a new contract for 5 years, so-called framework agreement, worth up to SEK 290 million. As usual, with this type of agreement, we are not guaranteed anything. But of course, when we get this type of agreement, we do expect the customers to put in orders. And several other orders also came into the quarters that I will get back to you in just a minute. Turning to Page 5. Just a quick update on development over the last 5 years. Our financial target of 20% annual growth in average has been met. We are at 20.6% from '15 to '19. On the EBIT side, you can see the illustration here shows that what I said, the scalability of our business model that we -- once we get high orders and sales in the quarter, we are able to deliver with short notice, and the scalability of our business is proven in those EBIT numbers. On Page 6, it's a slide that we've had now for quite a while, just to show, again, the fluctuations that we see in our industry and in our business. On the left-hand side, the fluctuation in order intake. And as you can see, the last stable Q4 '19 is indeed the highest for the whole period that we are showing here and in the history of the company. On the right-hand side, it is our revenue that is shown per quarter. And again, Q4 '19 was very strong, and the sales rolling average for 12 months period is showing a steady positive growth, despite the quarterly fluctuations. Turning to Page #7. As I said, we got this new 5-year frame agreement with the customer within the U.S. Department of Defense. And this contract replaces our first contract that we received in 2017, and that expired because they had spent all the money under that contract. So this is also some proof to us that they do actually intend to spend the money that is under the new contract, at least that's what we hope for. On Page 8, we got a new army customer also in Europe. This time, it's the Belgian Army. In partnership with Thales, in Belgium, we received an order for communication and hearing protection systems from the Belgian Army. And during the quarter, we received 2 orders, a total of SEK 55 million. And as always, when we get a new customer, we know that -- even though the initial orders are the largest one, we know that there are a number of opportunities for further follow-up orders over the duration of their use once they start using our system. They will expand to more users, and they will also often buy more different types of equipment. Page 9. Another significant development during the quarter was 2 framework agreements, and the first order from the Swedish Police. And during the last 2 years, we have been very diligently working on police customers globally, partly with our sales team in the U.S., but also with our sales team in Europe and Asia. And in Sweden, this is the first time we see a large police unit selecting our systems and where they have the intention of expanding it to a high number of users. We received the first order before the end of the year for about SEK 19 million. And those products have been delivered and are now being handed out, and users are being trained. So hopefully, this will lead to further orders down the road from this customer. But it's an important reference order and breakthrough into the police market for us. Similarly, on Page 10, we received our first order from the Japanese Police, actually 2 orders. It was not very large orders. But for us, they are significant because they are showing an entry into the Japanese Police market, which is quite large, and it also proves that many other police officers around the globe do have needs that we can meet with our types of products. These 2 first orders are for certain police officers that will use them during the coming 2020 Olympic Games in Japan. On Page 11. Just before the end of the year, we received an order from another customer in the U.S. Department of Defense for SEK 28 million. So this is not related to the framework agreement of the SEK 290 million. This is another customer under the U.S. Department of Defense that put this order in. And again, this is a new customer, and we believe that this, over time, can lead to more follow-up orders from the same customer. So again, a very good year and a strong finish to the year. On Page 12. Our strategy is unchanged. Going into 2020, we will continue along the road we have followed for quite some years in terms of increasing our market share in Europe, North America, Oceania. We will continue with the geographical expansion into selected continents in Asia, Middle East and South America. We will continue with our product development. And as we have talked about before, our development -- we have some development projects, including our new Intercom that has now been finalized and will be put into the market during 2020. And last but not least, the efficiency and scalability of our business model that we have proven a couple of times, and this business model that we will continue to fine-tune and improve as we move into becoming a larger company. So on Page 13. Just briefly on the Intercom. I have talked about that for quite a period of time. And as many of you know, it has been a little bit delayed, mainly due to new requirements from customers or additional requirements in the -- during the testing and the finalization phase of the product. There has been new additional input received, and we decided to include some of those input in the first release of the product. But now the product is fully developed as a first-generation. It is in test with several customers. And we, of course, know that as usual, this is a long process of testing and obtaining funding and so on. But we do believe we will see the first smaller orders for the Intercom Systems in the second half of 2020. The interest is very high. We have had that confirmed again in trade shows, both in the U.S. and Europe and elsewhere. This is a new innovative product solution, a solution that many customers can see useful. On Page 14. Again, just a short picture of the concept. There are 2 ways of using the Intercom Systems, either as a small portable, what we call, intercom in a bag or you can also fix -- install it in a vehicle for those that have that type of need. But the first sales opportunity for us is for the intercom in a bag solution that is shown on Page 14. The introduction now of the new intercom and also the fact that we are getting more and more into the police market has led us to update our market estimates or at least the sizes of the addressable market that we can look at. And we have updated those in this report. On Page 15. It's the numbers for the personal hearing protection and communications system. And these numbers are unchanged. As we have said many times, we believe there are about 2 million soldiers in the primary target group, addressable market in Europe, Asia and selected countries -- U.S. and selected countries in Asia, and that the annual addressable market is about SEK 5 billion. This is in a market where we have to date installed to about 200,000 users, which equates to about 10% market penetration. So this is our core market that we have been addressing for quite some time now. In addition to that, we have now been trying to make an estimate of the addressable market for police, and there is about 2.7 million law enforcement or police officers in the U.S., Europe and some of these selected countries in Asia that we will work at first. We believe that about 1/3 of those are in the primary target group for other types of products. We believe that they are the ones that, within a foreseeable future, will have modern radio communication. The challenge, as always, is to know when are they going to have money, funding, to buy modern equipment. But we can see, as in Sweden and in Japan and in Germany that this is happening slowly but surely in several markets. And doing the calculation on a very high level where -- with assumption that they carry out procurements with about 5 to 7-year intervals, we come to an addressable market of about SEK 1.5 billion per year. Again, these are rough high-level numbers for the addressable market. Similarly, we have tried to estimate addressable market for our new Intercom, which is not entirely easy because we have a new innovative product, and there's not so much to compare with. But we have tried as best we can here to start with the portable Intercom Systems, as described on Page 17. Here, we -- the starting point is the number of INVISIO users that are already out there, which is 200,000 plus. And if we say that there's about 5 users per intercom system, then the addressable market would be somewhere between 25,000 to 40,000 systems. And that would give us an addressable market of about SEK 500 million per year, if we can win them all. But again, this is the high-level addressable market. It's not something that will happen in the first year. This is something that we will have to work for a number of years to get to that point. In the second phase for our intercom, we are addressing, described on Page 18, the personnel carriers, the vehicles. And there, the numbers are quite a bit larger. We have been trying to look into several different statistics about vehicles in the military space, and the number we have been able to accumulate is about 650,000 relevant vehicles in the target markets around the globe. These are vehicles that potentially could benefit from our system. And if we calculate, estimate that they will probably change the system every 10 years, then that would give us an annual addressable market of about SEK 6.5 billion. So this is quite a large market for us to address. And of course, it will take time to penetrate that market. But if we can just get a smaller percentage of the market, that is definitely a very attractive opportunity for us. And as we have said in the past as well, this new intercom opportunity is at least the size of our current business. So there is a lot of opportunity for us in the intercom. But again, it's a long process, and it is public tenders and so on. So it does take time. Finally, in view of our positive development over a number of years, we continue to believe in our capacity to grow with good profitability. So our Board of Directors have proposed an increased dividend this year, for 2019, of SEK 0.85 per share compared to SEK 0.70 last year. In summary, when we look back, the successes during 2019 with new agreements and a growing number of customers does make us believe that we can continue to see good orders in the future, and that our position in the market has definitely being strengthened. So we look very positive on the continued development for INVISIO. That concludes my presentation. And operator, I am ready to take questions, please.

[Operator Instructions] So our first question is from the line of Yiwei Zhou.

Lars, congrats for the good results. I have a number of questions. Firstly, on the market potential for the police. And you said the total police officers around 2.7 million. And then how do you get it to this 700,000 to 900,000 targeted group? So what is -- based on what assumption?

Yes. I think, as I said, we think that out of the 2.7 million total users, there are probably 25% to 30% of those that we believe are in the -- it's a difficult word to call them higher end, but they are the special -- that they are the special forces of the police, if you like, and the ones that are in situations where they will be met with very high noise and in situations where they will need our type of equipment. So it's not -- it is probably not your ordinary traffic police officer. These are the more like SWAT teams, yes, special forces within the police and so on. And the best estimate we have made from looking at the different markets is that, yes, they are probably 25% to 30% of the total that falls in this category. It is only a few countries like we have seen in Sweden now, where they have the assumption that our police officers will be exposed to high noise level. Not all the time, and not every day, but at some point in time, they will end up in situations in football games or demonstrations or other situations where there's just a lot of noise and also where they need to be able to communicate.

Okay. And then your assumption of 25% to 30%, what is it based on? Is it based on your internal marketing?

Yes, it is based on our own internal estimates based on input from our sales teams. It is very hard to get valid statistics on these types of numbers. And especially, if you split them up into -- especially in the U.S., there are very many types of law enforcement groups on a local level, state level and so on. So it's very hard to get exact numbers. So this is our own internal best estimate.

Okay. Great. And the second question is on the intercom. So now you split the intercom market to 2 segments, the mounted and also portable. I understand the portable part. But just for you to address the mounted segment, is it fair to assume you will need some further product developments? And what is the time line for this Phase 2?

I think the Phase 2, I mean there will be some vehicles in that addressable market, for instance, the small light jeeps that we could address right away. So in some markets, they would say right away, well, yes, what you have right now is fully sufficient for the small jeeps and maybe some other types of vehicles. There will also be other types of vehicles in other countries where they will say, well, we -- it's a little bit further out in the future, we would need some additions maybe to what you have, or from a funding perspective, it is not possible until 3 or 4 years down the line. So it's a great mix. But you can say that the phase 2 will start to happen slowly also because there will be customers that will say, yes, we like the portable, but we can also see some of our vehicles where we can start putting it up already. As I've said -- but as I have said also the intercom that we are launching now is the first-generation solution. We believe that this will continue to grow into a product range over time that will consist of more products and future generations of products.

Okay. And the last question is on the -- your cash position. I see you have a very strong cash balance now. And could you indicate a little bit about the -- how are you going to do with the cash?

Yes. I think, first of all, of course, we are increasing the dividends. So that will take part of it. The second thing is, of course, as the introduction of the new intercom is also going to be an area where we need to be prepared because the products are more expensive. And at this point in time, we're just syncing out the first batch of units, but we will need to have a certain level of stock for the new intercom and all the related cables and so on. And how big that stock needs to be, we don't know yet. So we need preparedness for that. As I've also said before, we also need to be prepared for smaller additions to our product range in the terms of partnerships or smaller technology acquisitions. We are, as a market leader, often being contacted by others that have either products or technologies that they think could fit into our system. And we are, of course, evaluating that. So we want to be prepared and ready if something comes up that is relevant.