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

Good day, and thank you for standing by. Welcome to the presentation of INVISIO Q4 Report 2022. [Operator Instructions] I would now like to hand the conference over to the CEO, Lars Højgård Hansen. Please go ahead, sir.

Thank you very much, and welcome, everyone, to the presentation of our Q4 and year-end bulletin. And I'm happy, as an introduction, to say that we are now, after a couple of very difficult COVID years, out of the woods, and we are back on the growth track with record high sales in the fourth quarter. Some of the highlights in the quarter is, of course, the increased sales growth that stems from a very positive market development and our own sales effort. We saw record high sales in the quarter, and we also saw an order book that was high in the quarter and for the full year. It for the first time exceeded SEK 1 billion. Actually, it was SEK 1.1 billion as order intake. And that gives us, when we leave the year, the strongest order book ever in the history of our group. We are also pleased to see that the component situation is gradually improving, that we have been fighting with for several years. It is not over yet, but it is definitely improving. We are still paying somewhat higher prices on certain components to be able to deliver on time to our customers, but it is manageable at this point in time. So again, I think we are through the difficult years. And we have, as many of you know, been investing forcefully during the pandemic. And now we are a much stronger company with a lot of new products in our portfolio. We have a very able and large R&D organization and sales organization that are able to support the continued marketing and sales of our many great products. So if we turn to the financial results, we saw revenues of yes, just below SEK 300 million in the fourth quarter, which is the highest quarter ever in the history of INVISIO Group. And also the gross profits rose dramatically with more than 90% as a consequence of sales. We are happy to see some improvement in gross margin as well. We are still not at our ambition level between 60 and 65. But as I said, we still see that we have to buy components on the spot market for certain products where we need to deliver with a little faster manner. So estimated 2%, 2.5% of gross margin is because of higher cost to these spot market components. So for the quarter, our EBIT margin is above 25%, and the operating margin is well above our target of 15%. It came in at 20.7%. For the full year, of course, the EBITDA margin and the operating margin were not satisfactory. That was due to the first quarter of the year where we did see difficulties, both in revenues and in -- yes, being able to deliver why we were still investing in our organization. Order intake, as I said, around SEK 300 million in the quarter. And for the full year, SEK 1.14 billion, and that gives us an all-time high order book of SEK 625 million that we take into 2023. So on the following page, as we said, the order intake was about 85% stronger than same period last year. And if you look at the first diagram here on the left-hand side, you see the quarterly development and the rolling 12 months average for the order intake, and we have marked out the quarters and the years here where we saw the pandemic of -- the effects of the pandemic, where we were not able to visit customers in the same pace as normal and many projects were put on hold. So it is clear from this diagram as well that we are now out of the pandemic, and we are starting to see strong order intake. And that, of course, on the right-hand side, manifests itself also in the order book that has been increasing dramatically during 2022. On the next page for sales and gross profit, both are up more than 90% in the quarter. But as I said, gross margin is still affected by certain purchases that we need to do on the spot market. On the left-hand side, it's the sales per quarter and the rolling 12 months. Here again, we can see the period during '20 and '21, where the pandemic was holding us back. And on the right-hand side, we see a little bit of a stable or stabilization of our gross margin, but still moving in a positive direction. In previous quarters back in '20 and '21, we also saw that certain quarters were very much influenced by certain individual orders with a lower gross margin or higher gross margin for that matter. So -- but I think due to the broader product portfolio and the higher revenue levels now, we probably see less fluctuations in the gross margin that we have seen previously. But the gross profit, as you see per quarter, has increased dramatically over the past quarters due to the higher revenues. On the next page then, the EBIT margins and operating expenses. Operating expenses, as we've said many times, have increased during the pandemic, and we did that very deliberately as investments into both a new and broader product portfolio, our many new headsets, second-generation control units, our acquisition of Racal Acoustics, the new Intercom and also investments into the law enforcement police area. We have added costs, predominantly in the form of many more colleagues. And we think that is the right thing to do to support our continued growth. That had an impact, as you see on the diagrams on both EBITDA and EBIT during the pandemic years. But again, happy to report now that from the second quarter of this year, the curve has turned upwards, and we are back on a good profit levels in our business now in Q4. Turning to some of the business highlights during the quarter. We received an order for SEK 40 million from an existing customer. And for this customer, they decided to upgrade to the new Gen II system and with our new INVISIO T7 headset included. Both of the deliveries will be made in the first half of '23. And I did not say that when we talked about order book, but out of the SEK 625 million order book that we have right now, the majority, probably 85% of that, will be delivered during 2023. So regarding the order for SEK 40 million, again, that is a little lower than what we normally announced. In this case, it was an important order for us because it is an upgrade from our Gen I system to the Gen II system that we see with many customers. But there's also a little bit of a change in customer behavior where in the past, we sometimes got quite large 3-digit orders from certain customers. We see less of that now, but we see more what we call medium-sized orders, meaning from SEK 20 million to SEK 30 million, SEK 40 million and so on. And one of the reasons for that is simply that for the customers, it is easier from a logistics point of view to order in smaller batches, so they can plan their rollout and training and so on rather than having a huge inventory themselves then they just place more orders with us, but smaller orders. So I think that's a pattern we will see going forward as well. Now we also saw a volume order for the new Intercom system, which is, of course, very pleasing. There was an order for SEK 40 million announced, and this is a major country that has previously placed more orders with us. So now this customer have ordered for more than SEK 70 million. And this also shows that the Intercom system has a great potential, and we expect this to continue in '23 and in coming years. The Intercom system has been somewhat delayed due to the pandemic. It has been difficult for us to visit customers and introduce the product in an appropriate manner. But now, we are definitely seeing a very high interest for our solution and very much put together with our control units and headsets. We're also very happy to report, even though this was after the end of the period that we received a first major order for the Racal RA4000 Magna headset in the North American market, and this time with an order value of about SEK 42 million. And so as we required -- acquired Racal a couple years ago, we knew that Racal was very strong in the European and areas in Asia and the Middle East, but less strong in the North American market. So the teams from Racal and INVISIO have worked very diligently and very good together on getting the Racal brands back on the U.S. market. So I think this is the first result that we see. And actually, I think this is also the first time in more than 20 years that there is a new ANR tactical headset being introduced on the U.S. market that is actually designed for armored vehicles. So I think we are off to a very good start in the U.S. now with the Racal products portfolio, and we expect to see continued good business from that. We also know that the competitor has decided to leave this market in the U.S., which further enhances our market opportunities on the U.S. market. Law enforcement and security continues to be a high priority for us. And I think we are seeing good development in this area as well, both in the U.S. and in Europe. This is not where we see huge orders in 1 go, but this is more like a number of smaller orders are coming in at regular pace. And during the year, we saw a continued very good cooperation with the Swedish police force. We saw a new framework agreement with the Danish Police Authority and with several U.S. and European police departments that we now have on the client list. So good development there. And the development all in all for Q4 and the full year has led our Board of Directors to propose a dividend, unchanged, SEK 0.70 per share for 2022. Our dividend policy is that over time, it should be between 25% and 50% of profit after tax. And in the last 5 years, we have distributed about SEK 157 million to shareholders, which is a payout ratio of about 55%. Including the proposed dividend, the ratio is 57%, so a little higher than our objective. But again, the objective is over time. On the outlook side. We continue to see, as we have said now for quite a while, that there are many opportunities for INVISIO Group. We see a substantially increased defense budget in many countries, especially in Europe. And we also see that these projects are making it possible to upgrade equipment at a faster pace than we have seen in the past. The need for our type of solutions, modern communication equipment with hearing protection is very high in many countries, and that's definitely a high focus in this area. We have said that in the short term, there is a limited impact because many of these investments are longer term, but there's no doubt that already from 2023, we will start to see investments in this area that benefits us directly. And this is a longer-term trend where larger budgets and definitely also more soldiers will be an increased demand for our type of solution. So in summary, we see a very strong 2023. We are much stronger as a company and more stable as a result of the product portfolio we have, the acquisition of Racal and the strengthening and investments in both R&D and sales organization that we have done over the past years. So in combination with our current order book and the market conditions, we continue to see strong sales and order intake opportunities in 2023. Before we turn to questions, there was just a couple of things I wanted to comment in the balance sheet. There was a couple of questions yesterday on that, so I'll just take that up. And one is related to inventories. That is a little higher than what we had previously. There's 2 reasons -- a couple of reasons for that. First of all, we believe that inventory is a barrier to entry because we are probably one of the few companies in our industry that have inventory where we can deliver with short notice, and that is required by many customers at this point in time. So that is important for us. But it also sometimes varies quarter-by-quarter because we keep inventory, of course, up until the last day where we can ship. So there is a fluctuation by quarter in this. Same goes for trade receivables, which is fairly high, but that is -- has a very natural explanation. It's simply because we invoiced a lot in the second half of the fourth quarter. And most of our customers have about 30 days payment terms. So we will be collecting that money in Q1, so this is just a natural fluctuation in our business. So with that, I will end the presentation here and open for questions, please, operator.

[Operator Instructions] We are now taking the first question. The first question from Hjalmar Ahlberg from Redeye.

First question is maybe just if you can give some more flavor on perhaps what you see in terms -- I mean, you repeat that you see strong revenue potential for 2023. And if we look at Q4, I mean, this is exceptionally strong quarter. But would you say that this is kind of a representative for the current capability that you have in terms of deliveries? And what's the demand that you see out there, if you can give some flavor on that?

Yes. I would say when it comes to deliveries, I think we are demonstrating in Q4 compared to not only the same quarter last year but also Q3 that we can ramp up quite rapidly because we have high capacity in our manufacturing network. We have worked with the same partners for 15 years, and we have a very robust model now for ramping up manufacturing. So I would say deliveries is normally something that we are really, really good at. So the challenge has, of course, been the component situation during the pandemic where -- but I think we are at a point now where, as I said, we can get the components we need. We just maybe have to pay a little extra for some of them, but we are able to get. And we continue to build inventory again to make sure that we are able to deliver with short notice. So delivery situation in the coming quarters, I think, looks really good. And for the order book we already have, we have, of course, already -- we are in the process of manufacturing and planning and securing components. So that looks quite well. And for order intake in '23, as I said, the activity level is still very high globally. We see many things going on. Whether they turn into revenue in coming quarter is always difficult to say because there are still long lead times in our industry with customer projects, but at least we can see the activity level is high and with increasing budgets that also makes it easier for our customers to make decisions. We can also see that many customers are actually wanting to buy products from suppliers that are well respected in the industry and always have a good footprint. So they are not taking any chances with new solutions. They really want to buy something that is already proven, and that has been in service for quite some time, and that is, of course, to our advantage.

Right. Sounds good. And the question on -- you mentioned that you have some cost increase due to incentive program in Q4. Should you say that some cost there as a onetime? Or do you think the cost there will be similar looking over the next quarters?

It will be -- it will not be the same. We -- there was a little bit of a fluctuation in that program in 2022 due to the quarters being very uneven. So normally, we accrue for incentive programs throughout the years, but we didn't do that sufficiently in the first half of '22. But in '23, we will accrue for estimated costs related to that throughout the year.

Got it. And you also mentioned that you increased the capitalized development cost this quarter. Is that something that was more for this quarter? Or do you think you will have an increased level going forward as well?

I think this is just fluctuations between quarters, and that is a little bit related more to rules around what can be capitalized and what cannot and how we -- so for certain activities in '22, we have been focused on just selling variants and modifications of what we already have rather than new development, and that just influences the rate of capitalization. So that's just a yes, so that varies a little bit depending on what activities we do with customer and whether that is capitalizable or not.

I see. And maybe last one for me regarding the financial targets. I mean you had really strong profitability this quarter. And as you say, you are now a stronger, larger company than before. Are you looking over your kind of long-term profitability goal? Or is that still what makes sense, how the company looks today?

I think I will not comment on this at this point in time. I think this is also a question for our Board of Directors. So this is, of course, something we look at with regular intervals. And just coming -- as we say, coming out of 2 difficult COVID years, now we are back on track, but I think we'll probably be discussing this with the Board at some point in time. But I have no further comment at this point.

We are now taking the next question. And the next question is from Guy Thornewill from Pie Funds.