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

Good day, and thank you for standing by. Welcome to today's presentation of INVISIO Q3 Report 2021 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, the CEO, Lars Højgård Hansen. Thank you. Please go ahead, sir. .

Thank you very much, and good morning, everyone. Thank you for calling into the Q3 conference call. And the headline for this quarter is that we have continued to see a good order intake of smaller orders, but we have also seen a continued delay in the larger ones that are pandemic related and are the same delays we have seen for several quarters now. And these pandemic-related delays are due to several things. The processes of purchasing take longer than they normally do. Many people have been working from home and are not always able to perform. There are normal duties. We have also seen that it has been difficult to visit customers at locations and bases. So therefore, tests and other things related to purchasing have been more time-consuming and difficult than normal. But we've also seen in certain countries that due to the many costs associated with fighting the pandemic, there has been temporary changes in the budget priorities, which means that long-term activities like ours have been postponed a little bit. But the good news is that we don't think we have lost any business orders programs during the pandemic. We have merely seen delays in many activities. We can also state that we have not been affected much by delivery issues or component shortage so far in the pandemic. I think we've been very good at preparing and making sure that we are able to deliver. And I still think also that we are in good shape. But it is clear that there are longer lead times, both when receiving goods and also shipping goods as I'm sure you have seen in almost any other industry as well. So normally, we are very well prepared for fast customer deliveries. We can turn around orders fairly quickly because we have a good stock position. But in the coming quarter and maybe in the beginning of '22, we can see that deliveries to customers does take somewhat longer than they normally do, and that could affect our delivery capabilities. So these are the headlines. And then I would like to turn to Page 3, where we have the numbers for the quarter. And -- the revenue in itself was 20% up against last year's quarter and for the full year. So far, we are 23% up, which is in line with our own ambitions. There are, however, differences between the INVISIO-related revenue and the revenue related to our acquisition, Racal. So the Racal portfolio has been doing really well. Revenue came in at about SEK 57 million, which is the highest ever we have seen from Racal. And INVISIO, on the other hand, has had a lower revenue than last year. So it is clear that the INVISIO products are more affected. That market is more affected by the delays in larger programs than the Racal products. So Racal products are in a more mature market. There's a more stable flow of orders and revenues than we see on the INVISIO products. So gross margin ended at 57.7%, which is better than -- considerably better than last year where we had an unfavorable product mix due to some third-party deliveries and so forth. And for the full year, we are 57.8%. We are still a little below our own ambitions of being above 60%, but we are on our way to get to that point. In terms of EBITDA, it is quite a lot lower than last year, and of course, not something that we are entirely proud of. But I think that as we go along the presentation today, you will see good explanations for that and also that this is related to the preparation for growth that we are doing on a long-term scale within the company. And that has also affected our operating profit that is negative for the first time in a very long time, but which again, this is related to some one-off costs from the acquisition of Racal to an increased level of depreciation on our new developed products that we have recently launched, and I'll get back to the details in a minute. One of the highlights of the positive things of this quarter is the order intake. Although lower than last year, it entirely consists of what we call smaller and midsized orders. And we think that given the pandemic and the many delays we have seen, it is actually very good that we are able to reach SEK 165 million in order intake during the quarter. And for the full year, we are also 14% up towards -- or for the 9 months, we are 14% up compared to last year, which I think is quite acceptable given the very difficult market conditions we have seen. So we are pleased with that, and it again demonstrates that we are a much broader company today with many more products, many more customers and also spread over geographies and product lines. So this is a positive. And the order book at the end of the quarter was SEK 210 million, which was higher than last year. So turning to Page 4, just a few more details on the revenue. Actually, the currency-adjusted growth was 27% based on entirely small and midsized orders. So when we look at the 12 months rolling average, we can still see a good development on our sales or our revenues for that period of time. And the order intake, as we say, it has been difficult in '20 and '21 due to the pandemic, but I think we are still doing fairly well, and we are having a higher degree of stability in the business in the form of many smaller and midsized orders. On Page 5, we have also just shown the long-term development in the EBITDA and the EBIT margin. And of course, this is a different picture because it is going downwards. But again, this is related to our strategy of investing in the business for continued long-term growth. And if we just look at that on Page 6, there is a -- we just tried to illustrate a little bit that in the quarter, we have sort of the regular operating expenses consisting of the OpEx in INVISIO, in Racal and also the investment for growth. And then we have seen, on top of that, in 2021, an increased amount of depreciation and amortization related to, as I said, launch of many new products, but also related to the acquisition of Racal Acoustics. And then in this quarter, in Q3, we've had acquisition-related nonrecurring costs of about SEK 10 million that is, of course, in this quarter only and will not affect us going forward. So if we look at the OpEx amount in Q3, it is actually -- if we take the nonrecurring cost away, it is at the same level as we had in Q2. On Page 7, as well as in the report, of course, you have the details of depreciations and amortizations in Q3. And as you can see, there is a considerable increase compared to last year, which is for good reasons. Since again, we have announced and launched a number of new products as well as acquiring Racal Acoustics. Now on Page 8, we just tried to illustrate also what it is. We have been spending the money on investing and why it is that the operating expenses have grown even though times have been a little bit difficult on the sales side during the pandemic. We have a strong belief that INVISIO has a very, very good long-term growth opportunities. And therefore, we continue to strengthen the organization both in sales and in R&D, primarily. In terms of the sales organization, we now have a team of more than 60 salespeople globally where half is in the U.S. and half is in the rest of the world. And we have continued to add a few people here and there. We have, during 2021, been able to recruit a handful of industry veterans that have really long-term experience with our type of products and industry and that we think can contribute greatly to INVISIO's future. So therefore, even with the pandemic, we have, of course, decided to get these people on board, and they will help us grow the business, hopefully, going forward. In the same way, we have strengthened the R&D organization. In the last couple of years, we have worked diligently on a new software-defined platform that is future-proof. And that has led to some new products already. And in order to innovate and get to a new level, you can say, we have also recruited a number of R&D specialists and experts, for instance, in artificial intelligence, a number of software people and also a number of additional people to work on system integration. And some of that is related to our new Intercom system that is new in the market, but where we need to make a lot of efforts and support in the beginning to support the sales initiatives globally. We have also spent money acquiring Racal Acoustics, as you know, a global market leader within communication in vehicles. And so far, this has been a very good experience, and it was a very good acquisition for us. It fits really well with our strategy, and Racal has been performing very well in the first 9 months of initial ownership, and we look forward to continuing to grow and expand the Racal business globally with our very large sales team that will represent both Racal and INVISIO products. And last but not least, we have invested heavily in our product portfolio. During the pandemic, we have worked a lot in the machine room, so to speak, to make sure we have totally outstanding and new product portfolio now that we are slowly but surely able to get back and meet customers. We have -- we recently launched Intercom system. We have the T7 over-the-ear headsets, which is our own -- first own developed over-the-ear headsets. We have the RA4000 from Racal, which is their latest vehicle headset -- crew vehicle headset. We have the generation 2 INVISIO control on is based on the new platform that are now also ready to go into the market and including certain artificial intelligence features in it. So all in all, I think we are -- we have done the right thing. We have invested a lot in the business for long-term growth. So this is where we are spending the money and continuing to do so. On Page 9, I would also like to share a happy picture from a recent trade show in Paris, trade show called Milipol, where we are now, again, able to go back to trade shows and meet customers. We have been at 3 major trade shows in Q3 at DSEI in London at AUSA in Washington and at Milipol in Paris. So the attendance at these trade shows have been really good. A lot of people wanting to come back out and talk to us and see our new products and so forth. So the activity level is definitely a lot higher than we have seen in the first half of the year. So that is -- that is good news. On Page 10, I would also like to say that the introduction of our very innovative new Intercom system is progressing well. And for those of you on social media, you will be able to see updates regularly on LinkedIn and Twitter for some of the activities our sales teams are conducting regarding the Intercom. It is progressing well. We have a lot of activities regarding trials with customers, both in U.S. and in the rest of the world. We also have 2 sales and marketing or distribution partnerships that we can announce this quarter. One is with Zodiac, which is one of the largest RIB boat manufacturers in the world where we will be marketing the Intercom system on their RIB boats together with Zodiac. And another manufacturer, which is very cool and innovative is a company called SkyRunner that makes flying vehicles, so to speak, where the Intercom is also going to be a product that will be marketed together with the SkyRunner vehicle. Last but not least, customers in several countries have been helping us certifying the Intercom system on Black Hawk helicopters, which means that for these customers, they are now able to use our Intercom system on the Black Hawk, which is a widely used helicopter in many countries and also one where our product fits really well. So these cooperations will over time contribute to the success that we anticipate of the new Intercom system. Page 11, we have talked about this before, but we have a new technology platform that includes certain artificial intelligent features, and we really think this is a paradigm shift in the industry from hardware to software. It gives us a lot of advantages. And among other things, a higher degree and flexibility in launching new features and customized solutions. The artificial intelligence is also certain algorithms that is helping the user in his communication so that it is easier to distinguish what is speech and what is noise, what is it that you would really like to hear and transmit and what is that you do not want to transmit or hear. So it is really helping the user in the communication in a very high noise in a new way and this is a unique product that INVISIO is the only one in the industry to offer to its customers. So Page 12, we continue our journey. We have our focus areas that are not new. We continue the integration of Racal Acoustics with their products, which is going well. And we will continue to focus on selling Racal products in the large INVISIO sales organization INVISIO group organization globally. We will, as market conditions allow and opening up, continue to intensify our market penetration. The sales team that we have are out and about and will help us do that. We will have both a focus on military but also on law enforcement and security. And there, we utilize our own sales organization, but also large global network of distribution partners. And last but not least, we will continue to address selected countries in Asia, Middle East and South America. These have been the areas, from a travel perspective, most affected during the pandemic, but we do believe that there will be opportunities soon to start going back and visiting customers in these geographies as well. So in concluding, it is clear that the pandemic has impacted our sales in both '21 and '20 negatively. But we strongly believe that the underlying conditions for good sustainable growth continue to be very good. The need for our types of products, hearing protection and communication, is still very high. And we provide the solutions that will help customers protect their employees and also be able to communicate in very high noise environments. And we are convinced that our continued investments in the organization, our market development and the innovative product solutions that we bring out will continue to secure our long-term success. So all in all, conditions were strong and sustainable growth continue to be very good for INVISIO going forward. With that, I conclude the short introduction and presentation of Q3. And operator, we will now take questions, please.

[Operator Instructions] You now have your first question from the line of Yiwei Zhou of SEB.

I have 3, and I'll do one at a time. Firstly, on the order intake, could you please give us an indication on how much the order you got for your own products and how much is under the Racal brand?

Good question. I do not have that entire split, but I would say the majority of it is for INVISIO products. I would estimate, just off the top of my head, that probably SEK 130 million, SEK 140 million is INVISIO, and the rest is Racal. So in line with Racal's yearly revenue number in that ballpark.

Okay. And could you confirm you have continued to get Intercom orders or small orders?

Yes.

Okay, cool. And my second question is regarding the new sales distribution partnership. Could you also elaborate a bit on the -- on your profitability with those new partnerships? What markup you would give to the new?

Yes. So it works in different ways, but I would -- in many ways, it is just -- it is a marketing partnership. So we will be showing the product together, but we will also be selling separately. So they will not be selling our products, and we will not be selling their products. So it is a partnership where we will just be having our normal margins, if you like. So it's -- yes, so it is more like a marketing partnership to show the products at the same time.

Okay. And my third question is actually regarding the U.S. Army's remodernization program. Harris announced the first order from the program and saying entering to the full rate production phase. So would have you seen in your market with your customers?

We -- I have no further information than what you have been able to find yourself, I think. It is correct that the program is advancing. I'm not aware of what the delivery time lines will be for Harris or for Thales or those that are involved in this program. So we are still waiting for further information on what the rollout would be like. But it's definitely an interesting opportunity.

Your next question comes from the line of Hjalmar Ahlberg of Redeye.

Maybe first question on the...

We lost the line. We lost the line. We shall go to the next question from the line of Rebecka Gärderup of ABG.

Yes. I have 2 questions. The first one is regarding the Racal sales, which was almost twice as strong as in Q2? And my question is why was that? And is that a one-off or a seasonal effect? Or should we expect this going forward?

It's not a one-off, but it's not -- I mean, it is the normal fluctuations that are also within the Racal business as well INVISIO. So it is simply according to customer wishes for when they would like to have delivery. So I think we've seen -- you've seen revenues in an average of SEK 40 million or SEK 45 million for Racal so far for the quarter. And I think this is where we are right now until we start seeing more effects from the INVISIO sales organization. But -- so the level in this quarter is more a normal fluctuation.

Okay. So we should not expect these high levels in the other quarters?

Hopefully going forward, but I would not say that this is because of increased sales in Racal. Right now, it is just delivery schedules that customers have asked that we are delivering more now. But we would definitely -- we definitely believe that we are able to lift the vehicle business going forward, especially also when we get into next year, where we are starting to see the effect of having the large INVISIO sales organization help promote the Racal products. So we should definitely see a higher level for Racal, but I cannot say exactly when that will happen.

Okay. And the second question about the longer purchasing processes. Is that a post-COVID effect? And how long do you think that will last for?

It's a little hard to say, but it was definitely -- it has been like that under the entire pandemic because we -- many of our customers in the public sector have not been equipped for working from home. So they have been -- it's been difficult for them to operate normally. And it has also been forbidden to take people from the outside into many military bases and similar for reasons of the pandemic. So it has simply not been able to do the normal testing and the normal program activities as we've seen in the past. So we believe that now that the vaccination is continuing to improve and accelerate that things are slowly but surely going back to normal condition. And there is -- the needs have not disappeared. The needs are still there, and the programs are still out there. It's just that they are delayed.

Your next question comes from the line of Hjalmar Ahlberg of Redeye.

I hope you can hear me now. Just a question on the potential pipeline for larger orders. I mean, how does this look compared to years back if you kind of exclude the pandemic impact, so to say? Do you think your kind of pipeline outlook is stronger than a few years -- last year before the dynamic? Or how does it look for the next 1 or 2 years?

Yes. It's definitely -- I mean, as we said, I think there is- it's always difficult to quantify, and we normally don't do that either. But I would say that there is definitely an element of the famous ketchup bottle because things have been delayed, but the needs have not gone away. So I think we will hopefully see a pickup in 2022. I think the -- as I said, the challenge right now is also the delays in deliveries because of -- as we've seen container ships everywhere and waiting to be offloaded and so forth. But I think on the order intake side, I hope and think that '22 will be a return to our normal way of operating. And I think that's what we are seeing that the delays -- it will come back next year.

And I mean talking about the component issues and delays, do you also see any risk for impact on gross margin or any pricing issues there?

Not right now. Only what -- as many other industries, we can see that it's extremely -- it's foggy. There's a lot of -- it's chaotic because you can have a lot of components that you need for a certain product. And maybe you are just missing one component that is actually quite cheap. But without that simple component, you cannot make the whole thing. So it's just a lot of work to make sure all bits and pieces are in place. But I think so far, we've been doing well. And we also have the advantage that our manufacturing partners are really large contract manufacturers, and they have a different buying power than we have. And we have been really good during the pandemic in terms of buying as many relevant components as we possibly can. So we have a lot of components in inventory also with our manufacturing partners right now. So I think we are in fairly good shape. I will not say that we could not be affected, but I think we are in really good shape, actually.

And I mean, as you mentioned, Racal seems to be doing quite well. Is there a seasonality pattern here? Or is it something else driving the sales compared to, I mean, Q1 and Q2?

No, it is more -- it is a little bit -- again, Racal's business is with vehicle programs. And many of these programs have been running for years and are running for many, many years. So it's a more mature and a more stable business. So they will get continued orders from their customers. And then there are certain requested delivery times that we just have to meet. And that's why, in this quarter, the revenues were somewhat higher, and it has entirely to do with customer requirements. And we've been able to deliver on time for the customer requirements. So that's why it's a little higher this quarter than last quarter. So -- but it is the normal fluctuations. I think that the increase in the Racal -- the expected increase in the Racal business in general will come also from next year and onwards where we can start seeing the integration effects from using the entire INVISIO sales organization in addition to the organization that Racal has. So for now, it's just the normal volatility of the orders.

And last question. Sorry if this was already asked maybe, but you mentioned the nonrecurring cost of SEK 10 million. So that was on top of the acquisition-related depreciation.

Yes.

We have one more question at this time. It's from the line of Yiwei Zhou of SEB.

It's Wei again from SEB. And I have 2 more questions here. Firstly, on the gross margin, we have been seeing weak gross margin for several quarters. And I was wondering when do you expect the margin to normalize to the -- your ambitions level, 60% plus?

Sometime during next year. Because again, there is an element of product mix in here. There's also still the ongoing work of integrating the Racal portfolio into our. And then there's a product mix. And we, of course, also think that the -- once we start seeing a higher level of sales of the Intercom system that will have a positive impact on the total gross margin. So -- and we still have -- some of the things that are impacting us in total is that we are still delivering on certain contracts that are 6, 7 years old where we had a different gross margin at the time. But when we get orders from those programs, we have to deliver at the old sales prices. So I think, yes, that's a little bit of legacy here. But going into next year and further, we should be able to see a positive development in the gross margin.

Great. And my second question here is the -- so you mentioned the trade shows and customer activities have sort of returned to some good level. So if you compare it to that pre-COVID level, what index level are we looking to -- are we talking about?

If you take it region by region, you can say that Asia is where we have the toughest issues still. It is still very difficult to travel between countries there. And we also know that we can't do much of the business from our head office. We need to be on site. So that's where we are seeing the most difficulties right now. The U.S. is more or less back to, I would say, 80%, 85% of where you can go and visit people and so forth. And in Europe, it is a little bit country by country as the vaccinations are being rolled out. But we are traveling now on a daily basis, we are meeting customers on a daily basis. Sometimes it is not possible to go to their home bases and where they are located, but then we can meet them at other places in the neighborhood. So that meeting can start to happen. And we have -- I would say, when I look at the number of samples and the money we spend on sending samples to customers now, that is up to at least 80% of what it was prepandemic.

Okay. And can I just follow up here? So if the trade shows and customer activity have sort of returned to good level and -- has your visibility for the larger orders improved compared to 1 or 2 months ago?

Yes, it has improved, but there are still -- as always, larger orders are always within quarters. They are not within months, they are within quarters. That's just how it has always been. So -- but visibility has definitely improved.

Could you give us an indication of when the large order will start to come?

Next year.

There are no further questions at this time, sir.

All right then. Then thank you all for calling in this morning, and look forward to talking to you again soon, and have a good day. Thank you all.

Thank you very much. And that does conclude our conference for today. Thank you for participating. You may all disconnect.