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

Welcome to INVISIO's Q2 Report 2020. Today, I am pleased to present CEO, Lars Hojgard Hansen, and CFO, Thomas Larsson. [Operator Instructions] Now I will hand the conference over to CEO Lars Hojgard Hansen. Please go ahead.

Thank you. Good morning, everybody, and welcome to our call regarding the second quarter. Our highlights for the quarter is that we have continued strong order intake and a very well-filled order book. We have seen a record high order intake amounting to just over SEK 400 million. And the order book is now at almost SEK 800 million. Our revenues or sales exceeds SEK 1 billion for the first time, which is a milestone in the history of the company. We had two significant orders in the quarter, one from the U.S. Department of Defense, which is actually the largest order we have ever seen in the group, and there was another order for SEK 90 million from a European NATO country. So the development in general reflects the continued high market activity that we have reported for several quarters now and that we also believe is likely to continue for a long time. I think worth to note here is also that our sales growth on a rolling 12 months basis is 82%, with an operating margin of 19% on a 12 months basis. So the record strong order intake is of course very, very gratifying for us to see. And there was SEK 220 million announced, the two large orders that I just mentioned, and they were both related to Racal Acoustics branded products and for use in vehicles. In addition to that, there was almost SEK 200 million in unannounced orders. The orders have been well spread across geographies and product lines. So it just reflects two things. First of all, that we are a different company than some quarters back because we have a much broader product portfolio. We have a brand new product portfolio, and we are addressing a larger number of customers. And secondly, of course, the geopolitical situation that has given rise to a very high activity level, especially in Europe. The order intake for the first two quarters exceeds SEK 700 million, and we are at SEK 1.3 billion for a rolling 12 months period. So a very strong development, as you can see. And that also is reflected in the order book that now stands close to SEK 800 million. The majority of the order book is to be delivered this year. So the fact that the order book is growing is not a sign of us not being able to deliver. We are absolutely ready to deliver according to customers' wishes. We have, in the last 18 months, I would say, expanded and improved our distribution -- sorry, our supplier network. So we have second and even third sources on most of our product lines today. So we are very well prepared for deliveries for the rest of the year. If you look in the balance sheet on our inventory levels, you can see that that is significantly higher than previous quarters. It is almost SEK 200 million, and that just reflects upcoming deliveries. We have always had relatively high inventory levels, and that is just to be able to maintain a sort of smooth manufacturing as well as being able to meet customer requirements in terms of deliveries. And as we have almost only standard products in inventory, there is -- there's no scrapping. So this is a deliberate activity from our side that is also a competitive advantage that we have. So the revenue for 12 months rolling is now exceeding SEK 1 billion, which is a milestone in the company's history. In the second quarter, we reached SEK 270 million, which is 76% higher than the same period last year and 63% in comparable currencies. And for the first two quarters, we are now at SEK 600 million revenues, which is twice as much as the same period last year. Now back to the inventory levels. As I just said, we always deliver according to customers' wishes and desires. That means we are not entirely able to decide what revenues we should have in the quarter. It is also so that many customers have delivery terms where they want to pick up the goods themselves. It means that even if we have the goods ready in inventory for shipments, we have to wait until the customer picks them up and then we can recognize the revenue. And that's why a part of what is in inventory could have been turned into revenue in Q2 had the customer wanted it. So that's just the nature of our business and why we have volatility and fluctuations between quarters. So -- and that's also why we think that looking at a 12-month average and development is more relevant. So sales has been well distributed across geographies, but it is clear that Europe is in the lead, for good reasons, and Europe accounts for approximately 50% of total sales so far. Our gross margin is also developing well, and we are happy to report that the components supply is now back to normal. So we see very few spot market buys of components, and thereby we don't have these extra costs that we saw during the corona pandemic. As usual, the main drivers for our gross margins is the proportion of direct sales versus when we sell through partners and also the product mix between categories. But we maintain our view that we should be able to stay between 60% and 65% gross margin and maybe increasing going forward as more and more newer products are being adopted in the market. Our operating expenses developed in line with the trend and it is correlated to the number of employees. So the vast majority of our operating expenses is number of employees, and our recruitment is driven by business opportunities. We continue to see a lot of business opportunities driven by our close relationship with customers, and we will continue to go for those opportunities when we see them, also when it is connected to hiring more people. We still believe that our revenues will grow significantly more than our operating expenses going forward. So that should be a good relationship there. Our margins have substantially improved. The EBIT margin for the last 12 months, as I said, is 19%. And with the operating model that INVISIO has with outsourced manufacturing, then it is clear that both revenues and margins are heavily impacted on whether we ship products just inside the quarter or whether they are pushed into the next quarter. And that's again why it makes more sense to look at INVISIO on a longer perspective than just a single quarter. So yes, good development here as well. And to the larger orders that we received during the quarter, as I said, the largest one in the history of the company, SEK 130 million for hearing protection systems under Racal Acoustics brand, and this is to a customer in the U.S. And this system will be used in heavy combat vehicles, and most of it will be delivered during the current year. Our second order announced was also for Racal branded products, this time for European NATO country. And this is also to be used in heavy military vehicles, and similarly, most of the deliveries will take place during the current year. I think it's fair to say that our acquisition of Racal Acoustics a couple of years ago has been a success. The integration between INVISIO and Racal has been close to flawless, and we are a well-integrated group now. We work together. And the -- as we said earlier, when we acquired Racal, the combination of the Racal products and the large INVISIO sales organization is a winning combo. And this is what we see now, that the outreach to our current customers, especially in the U.S., is adding a lot of sales to the Racal products. In addition, of course, the geopolitical situation, where a lot of vehicles are now being replaced and new vehicles ordered, is giving a great outlook for our vehicle-related product solutions over the next many years. When we acquired Racal, we did finance the acquisition partly by loan and that we have repaid now during the second quarter. So INVISIO Group is again debt-free. We also introduced a version of our second-generation control unit, V60. This one is called the ADP, and that stands for all view data and power. And it is a very advanced PTT hub that provides more functionality and flexibility and also allows certain features, integrating systems and data to reduce the number of devices that a soldier normally has to carry. And it is built on the platform of our Generation II control units, the V series, and it adds the capability, as I said, to enable audio cues for other devices to headset as well as distributing power to other devices in the system. And by this, it will reduce the complexity of the system that a user has. This is a variant that is, at this point in time, a niche product, but we believe that certain customers will start to adapt this type of solutions going forward. So in summary, what we have been mentioning during the past quarters, there is a change. There is a new level for our type of business. We have seen the largest increase in military spending in Europe in 30 years. And there's no doubt that there is a massive need for modern communication equipment as part of that. The larger budgets will allow for faster rollout. We are seeing that now the record high order intake is absolutely also a result of those larger budgets and the need to change behavior fast. And in the longer term, as also reported by other companies in our industry, there is no doubt that the higher budgets will mean an increased demand and that this will continue for many years. This is not a short-term situation. This is something that will be for many years to stay, that we are in a growing and larger market than we were just a few years ago. So the many forward-looking investments that we have carried out in recent years is starting to pay off. And that, in combination with a substantial order book and generally very strong market, it means that we predict continued strong sales, strong order intake and good profitability for the rest of 2023. And that concludes the presentation, and we are now open for questions, please.

[Operator Instructions] The next question comes from Daniel Thorsson from ABG Sundal Collier.

I missed five minutes in the middle of the call here, but I'll ask my questions anyway, and we'll see if you answered them in the call here. But I had a question on rest of the world growth, which looked pretty promising here in Q2. Can you explain what drove that? What markets, any new countries you have expanded to or...

No. I think this is within our current business. And I do not have the exact details here, but we have a strong position both in Australia and in other parts of that region. But Australia is definitely a contributor to that.

So not a single large order or delivery to a new country, which you are expanding into, okay. And second question on the gross margin here. It was down a little bit versus Q1, which you had flagged already in April or May. And anything in the gross margin here in Q2 that turned out differently versus your own expectations? And then also how we should think about the gross margin going forward, driven by the purchase prices from inventory, et cetera?

No, it is just the fluctuation that we see. We had a very high gross margin in Q1, but it is down to individual orders and whether they are sold direct or, as you know, quite a large part of our Racal business traditionally has been sold through partners, vehicle integration partners and so forth. So it is just that mix that continued to make the gross margin fluctuate, but I think the direction is going upwards as we can see now compared to last year.

Yes. So just above 60% is reasonable to assume ahead as well?

Yes.

Okay. And then on OpEx, it came in pretty much in line with our expectations, but still up quarter-over-quarter and year-over-year, and you mentioned salary inflation, some new recruitments recently. Where are we in the OpEx growth now? Should we see a stabilization around these levels? Or do you have any new investments coming up we should be aware of?

Yes. No, I think the fact that the revenues will look and the order intake looks promising, that in itself will of course drive some OpEx. We still believe that the growth in revenues will be higher than the growth in OpEx. But in order to continue to grow order intake and also deliveries for that matter, there is a need for more people. So just by logic, when you double the revenues, there will be more orders to take care of. There will be also other internal activities that requires more resources. So we will continue to see development in OpEx. But again, I am of the conviction that our revenues will grow faster than our OpEx.

I see. And then finally, on future product development and product pipeline, have you met customers in discussions where they are demanding products which kind of don't exist today, that the -- that they tell you that [ we ] would like to have products like X, Y, Z with these features, et cetera, can you help us develop this? Which could sustain the long-term growth and also make your competitive advantages better versus competitors, driven by the increased military budgets, I guess, that they are demanding more advanced products?

Yes, absolutely. That is a constant sort of positive effect of the fact that we are very close to our customers, and we get a lot of input and ideas to what they would like. But there's also -- it's also very clear that there is a broad variation of the maturity levels between customers and countries where certain customers are still at a more standard basic level for what they require, whereas other customers are going very fast in the technology direction where products like the new V60 ADP that I've just mentioned is relevant. So there's a very widespread -- and the good thing about our situation in the market is, of course, that we have solutions to cater for any of those needs. But there's no -- there's no doubt that there is a lot of good ideas out there that we are trying to capitalize on, and that's also the reason for, of course, some of the increases in our operating expenses. This is related to also people in R&D where we think that this would benefit us and give us new products for coming years where we can see good revenue potentials.

The next question comes from Mads Quistgaard from Carnegie.

I have three to four questions, and I will take them one by one. So first, coming back to the order book, Lars. Can you be a bit more specific around the timing for this year?

Yes. I would say the vast majority, more than 50% and quite a lot higher, I would say, is due for delivery this year.

Okay. And what should we think about the third quarter with -- from a seasonality perspective, is usually your slowest quarter?

Yes. But as you can see in our inventory levels, we have a good possibility to deliver good numbers also in Q3. Again, the reason I'm hesitant to give indications is the fact that it is the customer sometimes that decides, even though we are ready and we have everything ready to ship, if a customer is not ready to receive because they need people in for training or whatever the reason, then certain revenues could easily be pushed out some weeks with -- and into the next quarter, and we don't -- there's not much we can do about that. So what we do is we make sure we have inventory. We make sure we are ready and then we try, but I would say the vast majority of the SEK 800 million in the order book is for delivery in 2023.

Makes sense. And then coming to the order intake. So is it any way possible for you guys today to quantify the effect from the increase in the defense budgets? What the impact is on your order intake?

No, that, I think, would be very difficult. I would also say that I don't think yet that it is so much related to defense budgets. It is more related to -- as we -- if we take them one by one, if we look at the hearing protection systems, there is, of course, a little bit of pent-up demand from the pandemic, but then there is just a continued need for updating capabilities in many areas. And we have, of course, also seen countries where not everyone in the army has had the type of system that they would require and that they have realized that we need to speed up now. More people need to have the same capability simultaneously. And then when we look at the vehicle market, yes, a lot of vehicles have been shipped over to Ukraine, which means that vehicle needs to be replaced, but that takes time, even though many orders have been placed with new vehicle manufacturers, it will take time to get those delivered. We can just see that there is a very high activity level around that. I don't think it's the budget in themselves. It's more just a general very high activity level in many countries. And that includes that there will be recruited more soldiers and just the capabilities in general, if you take them country by country, are being upgraded to higher levels.

That makes sense. Just looking in the past, we have seen a number of customers being quite hesitant to acquire your products. So I guess the increase in defense budgets would make them more [indiscernible], I don't know.

Yes, absolutely.