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

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

Thank you very much. Good morning, everyone, and welcome to the INVISIO Q4 and year-end bulletin for 2021. And the headline we have chosen for the quarter is that we had a challenging 2021, but it ended with strong order intake, and we have seen that continue in the beginning of 2022. But before we get into the numbers and the challenges, I would like to say that despite what the numbers reflect, I think we have had a very good development in 2021 across our business and in line with our long-term strategy. First and foremost, we did our first larger acquisition in the early part of 2021 with Racal Acoustics in the U.K. And I think that the acquisition has been a great success and addition to the INVISIO Group. Racal Acoustics products accounted for about SEK 149 million in revenue in 2021. And the integration of the two companies into one group with two brands has been very successful during the year, and we are definitely ready to grow those product lines even further. What the product line of Racal Acoustics have also added is more stability in the sense that the customers are found within vehicle programs with long lifetimes and also with element of service and repair that we have not been used to for the INVISIO product lines. And for the INVISIO range of products, yes, it has been a challenging year, much like 2020 because many of our customers have been unable to conduct tests and gather a large amount of people and initiate new hearing protection programs and tenders as we've been used to in the past. But we think that this is a temporary delay. We think that we will see some of these programs come back in 2022. So the need -- fundamental need for our solutions have definitely not changed, and we do not believe either that we have lost business to anyone in 2021. It is a delay in certain programs and activities for hearing protection systems for dismounted users as we say. Our newer focus areas like the Intercom and the law enforcement activities has done really well also in 2021. In line with our strategy, we have expanded our range of partners, both in the Intercom area and law enforcement. We have seen also very good orders coming from customers in both areas. And so I think we are on a good traction here for really good development over the coming years. What also is very encouraging is to see that we have now launched a new generation of hearing protection solutions for the dismounted users, our new generation 2 platform of products with a lot of new features and also including artificial intelligence algorithms to help our users even more in the very noisy and challenging environment they are in. And last but not least, we have continued to attract very talented people to our group, to our team, people with industry experience and people that can help us grow and continue to make sure we stay the undisputed market leader in the areas where we operate. So that is sort of the intro before we turn to the numbers on Page 3. And of course, when we look isolated on the numbers, we are not, I would say, where we wanted to be. As I said, we have been impacted of the pandemic, both in 2020 and 2021. Our revenues in the fourth quarter declined with 12%. And for the full year, we saw an increase of about 11% in revenues. And corrected for currencies, we are at a 15% growth for the full year. So again, this is where we would like to focus, of course, going into 2022 where we can see that the order intake has been improving in the late part of Q4 and also now into Q1. So we hope and expect that the order level will soon get back to some kind of what we can normal, and then that will also transform into higher revenues. Our gross margin is also a little lower in the fourth quarter and for the full year compared to previous year. We have had some temporary impact on gross margin due to certain components being more expensive than normal. This is, I would say, related to certain spot buys that we've had -- we've been forced to do in order to make deliveries, and certain components have just been very expensive for a period of time. We do expect this to also normalize sometime in 2022. We have, as many others, seen price increases from suppliers of components and raw material. And we have also, ourselves, made increases to our list prices to reflect that. So it is our belief that we will be able to offset the increases from suppliers on components and raw materials and so forth, so that we should not be impacted going forward. It does, of course, take a little time before things materialize, but it is still our belief and our ambition that our gross margins should be somewhere between 60% and 65%, a little, of course, variation across the different types of customers that we sell to. In law enforcement, for instance, our gross margins are a little lower normally because we sell through resellers whereas for certain military customers, it is direct sales with a higher margin. And there's also some variance between product categories. And so the mix of products and the mix of customers will determine what the exact gross margin is for a given quarter. Our EBITDA and also EBIT is affected by the lower-than-expected revenues, but also by the continued investments that we have made into the business. Again, we firmly believe that the pandemic will go away at some point in time and that we are building the company for the long run, and therefore, we should continue to invest in both organization and products and so forth. And that is what is reflected here, that we have continued our investments. And therefore, of course, the EBIT margin is below -- far below what we are expecting going forward and also below our own financial targets. On a positive note, our order intake was good in the fourth quarter, SEK 160 million. And also for the full year, it was up 20% compared to 2020. And I think that even with the absence of larger new programs, it is very encouraging that we now have stability in the business so that we have a number of smaller orders coming from all our focus areas, all our product categories and all our geographies that adds up and actually gives us a very good order intake in the fourth quarter. And the order book then stands at SEK 225 million, almost double of what it did at the same time last year. So that's a good start to 2022. Moving to Page 4. Just a few curves to illustrate what I've already said that we have the currency adjusted growth of 15% based mainly on small orders and, of course, the addition of the Racal Acoustics product line. So yes, it is below our own internal expectations and for the reasons that I have already mentioned, due to delay and prioritizations of budgets, et cetera. On Page 5, a similar curve on the EBITDA and the EBIT margin that, as I've also just said, are below our own expectations and have been declining for a number of reasons, but mainly due to lower revenues than expected and that we have continued to execute on our growth strategy with our organization and development of products and so forth. On Page 6, just a small overview because, of course, the acquisition of Racal Acoustics was a first time for INVISIO. And this also introduces a new type of expenses in the form of amortization. And also, we saw a number of products being finalized and ready for launch that we have invested a lot of resources into. And therefore, the depreciations are now at a higher level than we have previously seen. So you can say that the operating expenses for INVISIO have grown at a base level because of the investments into organizations and new products, but also due to the acquisition of Racal Acoustics. And in detail on Page 7, you will see that for full year 2021, the total amount of depreciation and amortization went from SEK 12.7 million in 2020 to SEK 45.1 million in 2021. So it's a significant increase in both depreciation and amortizations that we have not seen before. But none of these are, of course, cash items. So -- but they do influence the way the numbers look on a grander scale as we have not had these items in before. So following, Page 8, as I've said, we absolutely believe that the market is still there. All of our markets that we address are still there that they will come back, that they still have the needs that we are trying to address. And therefore, we have done the right thing in continuing to execute on our long-term strategy and continuing to also build barriers and make sure we are the market-leading company in our industry. So we, as I've said, have continued to invest in our sales organization. We have a team of more than 16 salespeople globally, which is far more than anyone in our industry. In the same way in the R&D organization, we have continue to add a number of colleagues across the different functions in R&D. We've added experts in artificial intelligence, more people in software and system integration, which is one of the strongholds of our company. And we have, with the acquisition of Racal Acoustics, now also the global market leadership for hearing protection solutions in high-noise vehicle. So this is a new niche that we add to our total offering. All in all, we have, as I said, broadened our product portfolio significantly with new product categories in the form of the Intercom, but also our own first over-ear headset, INVISIO T7, the new generation control units and, of course, the new RA4000 vehicle headset that has been very successful so far. And that leads me to the next page for the new agreement that we announced in the early part of 2022. We have received a 5-year framework agreement worth about SEK 275 million with a system integrator that holds a contract with an armed forces of European country. And the contract here is related to a vehicle modernization program. And it concerns the RA4000 Magna headset under the Racal Acoustics brand. As usual, when you get a framework agreement, there's no volumes guaranteed. But I would say that it would be very rare that you did not see significant volumes coming from this. So we do, of course, expect that this framework agreement will turn into larger orders over time. Over the 5-year period, it would be my expectations that the order level that we will see will be close to that amount over time. But we will, of course, get back and announce once we get a specific orders related to this framework agreement. We have also in Q4 been able to put a new army, European army on our customer list. It is the first order from this army for our personal systems, and we received an order for about SEK 25 million. Now there is a follow-up order to this or actually, the two orders are connected, and that's why we are very confident in saying that we will have another order for about SEK 20 million within the first quarter here probably. So the total order for -- first order for this customer is about SEK 45 million in total, and this is definitely an army also where there is a possibility of larger orders to follow over time. Turning to the next page, a few comments on the Intercom. Despite the difficulties in visiting customers and travel and so forth because of the pandemic, we have continued to see good progress for the Intercom. Those of you also following our company on social media, we'll see that our postings now and then from different activities with our Intercom and our other types of products. During the fourth quarter, there was, first of all, a real order from a European NATO country that has bought from us on several occasions, and now they added a new order for 40 Intercom system. So we believe this is sort of the pattern we will see from other customers as well that they start with a few systems, and they buy another 5 or 10 and then they continue up to 40 here in this case. And then hopefully, as we progress slowly but surely, this will spread like rings in water and become even more systems for this country, but also I see similar patterns for other countries. In the U.S., we received a very interesting but nonbinding order from a company called SkyRunner. That is a very innovative company for light vehicles. And they have contracts with customers in the U.S. that they are expecting vehicle orders from up to about 200. And SkyRunner would like to have our systems tied to that. So when they get orders for vehicles, we can then expect to get order for vehicles or for Intercom systems as well related to that. But so far, there's no orders tied to it, but we do expect to see orders from this somewhere in 2022. So in general, very good progress for the Intercom. And of course, this is now 2 years into its launch, and we expect that 2022 will be a really strong year for the Intercom business. Continuing to the next page with law enforcement and security. So I think it's about now 4.5, 5 years ago since we started our initiatives, more focused related to law enforcement and security. And we have continued to see good development in all geographies in this area, and 2021 was no exception. We have continued to see a reinforcement of the sales force and the distribution network, and we are seeing that we have more and more products out for test. And of course, this is a little bit different because we also often involve partners, distribution partners in different parts of the world. But I think we have come to a point now where we have a very solid foundation in the law enforcement area, and I expect that we will continue to see good growth in this area also over the coming years. And the largest contract so far has been with the Swedish Police Authority. And we were happy to see that they have extended the contract by another year, and we continue to see good orders from this customer as well. So very positive on the law enforcement and security area for 2022 and onwards. So all in all, as I said, we have had a good year despite difficult financial conditions. And we are positive that markets will return to some kind of normal during 2022. And this is also why our Board of Directors have proposed that we keep our dividend unchanged for the year of SEK 0.70 per share, the same as last year. So this is the dividend proposal. Now finally, again, as I said, the last 2 years has been very challenging for many reasons. And for us, it has been related to not being able to do business because many of our customers have been at home and not being able to perform tests and do what they normally do, and also some postponements of funding and so forth. But we still believe we have continued to develop our company. We have carried on in line with our growth strategy. And we have a very strong market position now that things start to open up again. And we will still see in the early part of 2022 that there are disturbances in supply chains, there are deliveries that are taking longer than normal, there are certain components where we need to pay a little extra to get them in quicker and so forth. But we do believe that this will gradually return to normal conditions throughout the year. So with that, I will conclude the presentation. And operator, I am open for questions, please.

[Operator Instructions] The first question comes from the line of [ Erik Karlsson ].

It's [ Erik Karlsson ] from KP Capital. I had a question on your bread and butter business, the military segment, which I believe has been perhaps the most impacted by COVID, just correct me if I'm wrong there. But it would be good to hear your views on how you see that part of the business going forward, what do you see. And maybe also in terms of radio deliveries, what you're seeing there, which is often a leading indicator for you.

Yes. Thank you, Erik. I agree. The soldier system part of the business has been the one that has been most affected. And as we said, again, it has been difficult because most military bases and many of the people in the buying organizations have not been available for a period of time. And of course, you can say most of the activities that happens in this area are longer-term modernization programs, and they are rarely very, very urgent. They are always part of a longer-term modernization. And that's also probably why we have seen some of the delays. And then, of course, we are depending on radio supplies as well. Of course, many customers already have radios, but there are also customers where they are tying the activities to acquisition of new radios. And we, of course, try to follow the information that comes from the large radio manufacturers like L3 Harris and Thales and others and see what they announced in terms of new radio contracts and so on. And there, we can see that it seems like the business level has been picking up, and they have been receiving quite substantial radio orders from several geographies, including the U.S. The difficult to hear for us is, of course, we do not know when those deliveries or radios will take place. And then they might also be COVID affected in terms of delivery times and components and so forth. But on a little longer scale, there's no doubt that the number of radios will increase significantly in both the U.S. and in Europe over the next years. And once that happens, that does open up opportunities for us with our hearing protection solutions. So we can also see in general that we do not believe that customers have either reduced or lost any of their budgets or funding. It has just been a postponement. And in some countries, we have seen that because of the very high costs associated with fighting COVID, some reallocation of funding has happened short term. But we do believe that the spending on these programs will come back. There's no doubt that the need for modern hearing protection and communication solutions is still there. There's definitely no change in our view to the market need and demand.

That's very helpful. Maybe one follow-up, if I may. Just on the order letter, you said you hope it to turn it to more normal levels, and I appreciate it's lumpy. But on average, what would you say is a normal order level now going forward?

Yes, that's a good question. And we do not give normally any guidance or indications on. But I think if you look back just over the last years, you will see that the -- if you just look at the ordinary order intake per quarter, excluding any larger orders, you can see that, that has increased quite significantly. And now I guess, if you look back over the last 2 years, our regular order intake, so to speak, is somewhere between SEK 100 million and SEK 150 million per year. And then we've had traditionally some larger contracts on top. So I think to try to answer your question, we will -- we are expecting to get back to something that can support our ambition of growing with 20% per year in average. So that is where we are still aiming to be and where we think that the market needs can support it. And it's also early days still. We've also said that we see large opportunities for the Intercom system. And we have not seen any of the larger orders yet, but there's no doubt in my mind that, that will -- it is a very large and important market, and it will be important to us over time. But as usual, the timing is difficult to predict. But yes, I hope this answers part of it.

The next question comes from the line of Yiwei Zhou from SEB.

I have two questions here. And firstly, regarding Racal. I remember initially, you sort of gave a guidance of Racal is due to contribute to around SEK 120 million, SEK 130 million sales in 2021. Now you delivered SEK 150 million for 11 months, SEK 160 million for the full year. So clearly, it's better than expected. But now considering the new large contracts, could you please also give us an indication for 2022 here?

Yes. Thanks, Wei. Of course, as I said, we do not give any guidance, but I think that I can say that we -- even though the Racal Acoustics products are sold to a little more mature market like the vehicle market than the INVISIO product line, I would still believe that we are in a good position to continue to grow products sold on the Racal brand as well. I think Racal has unique position in the market with some new product lines. And I think the fact that we are now able to integrate INVISIO and Racal products into systems is a very strong offering that we can bring to the market. As you know, we work a lot with product systems and not individual products. And therefore, including the Racal products into the INVISIO solutions gives us a strong way of increasing sales. And we've seen that already where existing users of INVISIO systems are now also asking to have Racal products included. And for vehicle solutions, we have a possibility of coming with INVISIO solutions as well and adding that to the range. And from a geographical point of view, as we have said, the Racal product lines have been sold mainly in Europe and rest of world, whereas there is a large untapped potential for us in the U.S. with our sales team and so on. So I think we will still see some lumpiness on the Racal side as well. But I think, definitely, over time, you will see that we are able to grow the Racal business and with good profitability. And I think this contract, the new framework contract is just one first example of that.

Great. And my next question is on the OpEx. Is it fair to assume that Q4, around SEK 85 million at the run rate when we go into 2022? Or should we expect another ramp-up on all that?

I think when it comes -- there's, of course, some uncertainty related to OpEx in the sense that for quite a period of time, a lot of travel has been postponed and trade shows and so forth. So there's no doubt that in 2022, we will be traveling a lot. And depending on what flight tickets and everything else is doing, that will have an impact. And we will participate in more than 60 trade shows more than ever. So all of those activities, which are sales related, will have an impact. But I don't think that it will have a -- so a huge impact on the OpEx level. And we have also during the pandemic, increased our cost to samples and sales support from here. So that could, of course, go down a little bit once we start travel. So I think that level is probably realistic going forward. We do not expect that we will increase our organization significantly over the next year. We do have a very well functioning and good organization now. As I've always said, we might add a couple of people here and there if we see increased sales levels or increased activity levels that we need to support or something like that. But in general, we do not see the need for large organizational increases at this point.

The next question comes from the line of Rebecka Gärderup from ABG.

It's Rebecka Gärderup from ABG here. My first question is regarding the gross margin that was weighted down by a higher component costs and the sales mix. Do you want to give any indications on what products that have better or worse gross margin, for example? And also a question, yes, regarding that. Is Racal's margins in comparison to INVISIO's? Are there any major difference on gross or EBIT levels?

If we start with the Racal products versus INVISIO, when we acquired Racal, we said that the gross margins for Racal products were somewhat lower because of the fact that most products are sold to system integrators and to large modernization programs for vehicles. But I think the Racal team and us together have worked very diligently on that already, the first year. So I think we are on a good track here together. The Racal team has also been very -- and the sales team very good at making sure that we get the necessary price increases that we should to get up to a similar level to INVISIO products, and we are soon there. So I do expect the Racal products to have the same gross margin as INVISIO over time. Then there is -- within the Racal product line, there's a higher gross margin on service and repair compared to physical products some time. So that mix could influence that for the Racal products. For the INVISIO product line, it is, of course, a little more complex because for our own products, especially the control units, the headsets, the Intercom system, we have very good and healthy gross margins. And then sometimes, we are forced to sell third-party products together with our solution. And that's why sometimes the gross margin will be brought down because when we sell third-party solutions together with our products, those third-party products only gives us 35% gross margin maybe. So that -- depending on the volume and the mix there, it can have an influence. And sometimes also, there can be specific legacy cables that needs to be included that just have a established pricing where we need to deliver on a certain price point, and that gives us a lower gross margin for that specific cable. So it's a mix of many things. But you can say that the core product developed by Racal and INVISIO have very healthy gross margins. So it is a little bit the mix. And then we come to the sales side where there are list prices, which are very -- have very good gross margins. And then sometimes, we sell through resellers, which then reduce the margins somewhat, especially for law enforcement. We do also have a couple of legacy contracts that we've had for many years where pricing and gross margins were a little bit lower at the time, but we are still selling to those customers. And that's why when we get orders from some of these older contracts, the gross margins can be a little bit lower. So it is a mix of many, many things. But I would say looking forward and just taking it to the core, then our own developed new products does have very healthy gross margins.

Okay. One more question for me. You mentioned that you increased prices for -- the list prices for customers. Do you think that will affect the order outlook in the beginning of 2022 or going forward?

No, I don't think so. I think we are doing this gradually. And it's also in certain instances where we already have contract with a certain customer that there are -- it is already regulated, what type of increases we can make. So the list prices will implement itself over time and for new customers and when we can renegotiate pricing and so forth. So it will be a running process throughout the year.

And do you think that the -- that we will see these large orders like acting out in terms of sales in -- before like second half of 2022 or before? Or is it the second half that we should look into?

As I normally say, is it possible? Yes. Will it happen? We don't guide on that because, again, there is still high uncertainty on deliveries and components and so on. We can see that also some of our manufacturing partners have very high inventories on components. So they are prepared to 95%. But sometimes it is 1 or 2 small components that can delay the whole process. So it is a little bit. The only thing that we can say is that the activity level is very high. We had our first large trade show in the U.S. in January, and the attendance and the activity level, the customer interest was, I would say, almost back to what we saw before the pandemic. So we are definitely convinced that the activity level is going to be high. And we have -- our main focus now is to get orders, close deals, get business. And then we will have to deal with deliveries, which, of course, we are trying to plan at the same time. But our first priority is to get orders.

The next question comes from the line of [ Erik Karlsson ] from KP Capital.

It's Erik again. Thanks for taking another couple of questions. Just on market shares and your market position, you were clearly gaining market shares pre-COVID. Would you say that anything has changed? Have you accelerated that? Or there's no real change due to COVID, how your competitors are acting, investing in new products or focus on this business? That would be interesting to understand.

I think I do not have any numbers to support either yes or no, more than we can say that I think that the market is still dominated by a few players. As we have mentioned many times, I think 3M PELTOR has been a large player in this industry for many, many years. And then there is INVISIO, and then there is a couple of helmet manufacturers that also now are offering headsets and other things that you can mount on helmets. And then there are a few local players in Europe and U.S. that, yes, has been in the market for years, but do not have a global outreach in any form or shape and it's more simpler products. So I would say that the competitive landscape has not changed much. Anyone is, of course -- or everyone in the industry is, of course, bringing out new generations of their products, but we have not seen any leap in technologies or any new solutions or anything that -- I would say, that our own launches has been the most advance that has happened in the industry, especially with our new generation 2 platform. And also in the area where Racal products are, the new Magna is by far the most advanced vehicle headset in the market. And the Intercom has very little competition because it is a new category. And on the law enforcement side, only, I would say, local competitors around the globe. INVISIO is the first company here trying to claim a global position and being active in all of the regions. And so no, I would say it's pretty much an unchanged competitive landscape.

Lars, do you have a sense of order of magnitude of your market share, perhaps military -- in military, law enforcement and Intercom globally? Maybe military, the most meaningful, at least.

Yes. No, we actually don't -- we don't measure that because we do not find it really meaningful. And also it is hard for us to obtain real details about numbers from our competitors and so forth. So we do not, ourselves, measure our market share in that sense.

But do you think that your market share in military interest is below 10%? Or is it...

I would more say because we -- the way we look at it is more in terms of the addressable market and how big a part of the addressable market we have. So we would say that the addressable market, as we've said for dismounted soldiers, is about 2 million users, and we have sold about 230,000, 240,000 systems. So we have only sold to 10% of the addressable market. So there's a lot of potential for us. Yes.

Okay. That's helpful.

Another company -- another competitor might define the addressable market differently, depending on how they're set up. I don't know about that, but that's the way we have decided to, I think.

Okay. So that's the way to look at it. Okay, that's helpful. And maybe one quick question. Given that Racal has turned out to be a very successful acquisition both financially and strategically, are there other acquisitions out there that you may consider?

As we've said, we -- this industry is not one that is screaming for consolidation and has a lot of players in it. It is a smaller industry. And I also think that our -- we have a very advanced technology and product positioning. So it's not -- there are not many that are relevant for us. It could be interesting technologies, but it could also be as we, of course, advance into other areas. Now we have gone into law enforcement and security. So there are other opportunities out there, yes, but we do not intend to live off acquisitions. It will be select acquisitions. Good. Thank you very much. If there's no further questions, Mrs. operator, I think we will close the session for today. Thank you, everyone, for calling in and listening today and look forward to speaking with you again soon. Thank you all.