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

Welcome to Invisio's conference call regarding the Q3 results 2023. [Operator Instructions] Now I will hand the conference over to CEO, Lars Højgård Hansen; and CFO, Thomas Larsson. Please go ahead.

And hello, everyone. Welcome to our Q3 presentation. We will jump right into it. And the headline we have chosen for this quarterly report is strong sales and a healthy order book. So the highlights for the quarter is that the positive operating trend continues and continued in Q3. Our order intake was higher than SEK 250 million despite the fact that no larger contracts were announced. Our order book after the quarter exceeds SEK 600 million and our revenues exceeded SEK 300 million, which is the highest ever for a single quarter -- sorry, the order book exceeds SEK 700 million. Revenue exceeded SEK 300 million, highest ever for a single quarter. And that means that our sales growth for last rolling 12-month period exceeds 85% operating margin above financial targets, both in the quarter and for the rolling 12. So we continue to see high activity level in our markets. We have participated at the 2 major trade shows, DSEI in London and AUSA in Washington. And both trade shows were very, very busy, high number of visitors and a high interest in our new and existing products. So looking at the order intake, we are now at an cumulative level of SEK 1.2 billion for the rolling 12 months period. As I said in the quarter, we saw about SEK 250 million, despite the fact that no larger contracts were announced. And this was a good mix of medium and smaller-sized orders from existing and new customers and across all geographies. If we look at the year-to-date, the first 9 months, the order intake is close to SEK 1 billion, it was -- sorry, SEK 975 million. So we have, throughout the year, seen a continued strong inflow of medium-sized orders from all of our product areas and also across geographies. Most of the order book will be delivered in the next couple of quarters. But as always, we operate in the way that we do what our customers want us to do. We have explained earlier that especially the Racal branded part of our portfolio is sometimes linked to longer-term vehicle programs where we will deliver in accordance with deliveries of vehicles. And therefore, those deliveries might be further out in time. For the Invisio branded part of the business, we are also often tied to training programs and delivery of radio communications equipment and so on. So therefore, the delivery capacity is not always linked to what we can do. It is linked to other things that the customer is receiving. And therefore, the customers' desires for delivery is what is making our revenues. We are very well prepared. We have a high level of inventory of finished goods for both our Racal and INVISIO branded products for all the product lines, hearing protection products and Intercom. So in anticipation of orders that will arrive over the next quarters, we have a very good delivery capabilities and we believe that is a competitive advantage for us. And as said many times, this is standard products that we have in inventory. So there is basically no scrapping. It is things that we know we can sell. Turning to revenues. Revenues of SEK 312 million, 60% up from same quarter last year or 48% if we look at comparable currencies. And for the year, so far, first 9 months, we are close to SEK 900 million and SEK 1.2 billion in rolling 12 months. Even though we are a larger company now and more stable, maybe in both order intake and revenues, we still believe that rolling 12 months scenario is more realistic to look at rather than individual quarters as there might still be fluctuations. And as I said before, we are not always able to decide what will be delivered. It is pending customer requirements and other things that they have ordered. So looking then at the gross margin, satisfactory for Q3 and for the first 9 months, it exceeds 60% for both the quarter and the 9 months. And the main drivers of the gross margin are as usual, the ratio of direct sales versus distribution and of course, the product mix. And I think post-COVID, we have been able to compensate for the different price increases we have seen from suppliers during and after the pandemic and with our own price increases we seem to have found a good balance. At the same time, we have also now a higher percentage of newer products in the product mix, which has a little higher gross margin than previous generation. So all in all, we are satisfied with the level of gross margin, which is higher than the similar period last year from 58.4% for the 9-month period to 61.5%, so 3% up on the gross margin and more or less the same for the quarter. Operating expenses increased somewhat in the quarter. And there's a couple of reasons for that. The underlying operating expenses are not much higher than in previous quarters, but we have made a provision now for our internal yearly bonus program that we can see is developing well. Now Invisio has a very strong company culture that has been developed over the last 15 years. We are very focused on common ambitious financial targets for growth and earnings and our yearly bonus program that is for everybody in the company has been an important factor of our culture over many years. In 2023, we are doing extremely well -- performing extremely well in both order intake and operations and EBIT. And therefore, we expect a strong payout from our bonus program. And therefore, we have taken what you can call a one-off extra provision for the bonus program in the quarter. Our OpEx is also affected by the fact that we report in Swedish krona, whereas all of our OpEx cost basically is in other currencies. So our costs are in Danish krona, in U.S. dollar and British pound in Euro. But because of the negative development of the Swedish krona, this, of course, affects when we turn everything into krona at the end of the day. And we estimate that the OpEx increased by about 33%. But in comparable currencies, the increase was only 25%, which is approximately a difference of SEK 21 million. So this is sort of a part of the way we operate with an internal bonus model that we have to provide for when we can see that the results are much higher than planned for the year. And I'm very happy to report that for all the employees of Invisio Group who have done a fantastic job throughout the year to make sure we can meet customers' expectations and deliver strong revenue and growth in order intake and good margins. So the margins are at satisfactory levels, despite the extra provision to the incentive program. We are well above our EBIT targets of 15%, both for the quarter and for the 9 months period. We achieved 16.4% EBIT margin for the quarter and 20.2% for the 9 months period, compared to a very low number for the previous year same period. So moving in the right direction at a strong pace. Moving away from the numbers, as I said, a very high level of activity in our markets. And there's no doubt that the spending related to Defense has seen a new dawn in what -- aftermath of what is happening in Ukraine and now also in the Middle East. And we still would say that the growth that Invisio has seen in 2023 is a little bit the aftermath of the pandemic, on pent-up demand and that the many new investments into the military markets globally is something that we will see over the next many years. We -- from talking to customers also at the recent trade shows, we believe that some of the first investments will happen in the later part of 2024 and then onwards, but it does take time for many of our customers and so on to plan and to do the right activities in terms of deciding what to buy and when to buy it and what volume to buy and so forth. So there's a lot of work and planning to be done before some of these projects will be realized and that's also why the activity level is very high. So the picture you see in our presentation is from our very busy booth at the DSEI trade show in London in October. I think many of you are familiar with the fact that there will be new tougher EU regulations related to sustainability. And it's definitely in the process of becoming a procurement parameter also in our industry, Invisio due to the size of our group will start reporting in line with the new EU regulations by 2026 and I think that this is something that is very important to us. Sustainability has been a natural part of our company from the beginning. Our entire mission and vision of trying to reduce this offering related to hearing damages and so on is a sustainable business idea in itself. So we have started a major ESG project and finalized the first part of it now in Q3, but we will continue this project so that we are ready to report as we should by 2026. And we believe that this is an important parameter for further competitive advantage and our ability to strengthen our offer even more in our markets. We believe Invisio is in a strong position to take advantage of these regulations and turn it to our favor. Finally, we continue to have positive expectations for the coming quarters. As we say, market activity is high and we believe it will remain so for a long time to come. So we continue to expect a strong order intake and we believe that revenue and profitability will remain strong over the course of upcoming quarters and probably also longer than that. As always, and even though we are a larger and more stable company, there will be fluctuations. Some quarters will be much better and some quarter quarters will be less good. So as always, we think that Invisio should be judged on a longer time frame than just a quarter because fluctuations is part of the industry and the markets that we address. So with that, we conclude the short presentation of the quarter and the first 9 months and we will now turn to questions, please.

[Operator Instructions] The next question comes from Hjalmar Ahlberg from Red Eye.

Maybe first question on the visibility on deliveries. I mean you did mention that it's not always in your hands to decide when products are delivered, but what you see for Q4? Do you have better visibility than normal? I mean you did mention inventory buildup and so on. Any potential comment on that?

Yes. I don't think the visibility is any better. I think there's -- that we do, of course, have a number of orders already that we know should be delivered before the end of the year. And then we also normally get a number of orders within a quarter that is for more or less immediate delivery. So depending the mix of the 2, then we will see the outcome of the quarter. I think 1 of the -- little bit uncertainties there are in the market, especially in the U.S. right now is the political situation where there is a little bit of a delay with the budget and the speaker situation, which has led to -- which is often the case in the U.S. market that they operate on a so-called continued resolution and meaning that new projects are not initiated until the situation is resolved. So yes, so there's a little bit of uncertainty. But as we said, we have a good order book to deliver on and we expect new orders to come in during the quarter also for delivery. So I would say we have a more or less similar visibility to previous quarters.

Right. And you mentioned also that you have not really seen any impact from higher defense budgets. But do you kind of see this in your order pipeline? Or is it only that you say -- I mean, it's more based on market activity or any tangible evidence that is coming in the coming years?

No. What we can see is, of course, or hear is when we talk to customers in many countries is that they are talking about activities that they would like to implement. And programs that they would like to start and needs that they have and so on. So that's what is constituting the high activity level that there is a lot of, yes, interest and investigation and questions and all kinds of things, but it's not turned into -- the majority of it is not turned into real projects yet and I think that is where everyone is just trying to get the overview and then they'll go back home and find out exactly what plans they have in which order and size of programs and so forth.

All right. And I mean, you do say that you expect continued strong revenue and order intake in the coming quarters. But if you look into the kind of full year or 2024. Do you think you need to see impact from the defense budgets to be able to grow or to make another step in your run rate revenue?

Not necessarily. I think, again that we are seeing good development in all areas. Of course, our hearing protection systems under the Invisio brand is very strong and we have just recently launched a second generation of the control units, our new headsets, the V60 ATP, the audio data and power unit that we are showing now. So these new products will continue to drive growth of the Invisio brand and hearing protection solution. And then we have the Racal branded solutions for vehicles, which has been doing really well in '23, where we also know a large competitor has left the market. So we expect that to grow also significantly in 2024 when we hopefully take more and more market share and the new Racal products are being introduced in more and more places. And the Intercom has been doing well so far, but it still has not really reach the potential that we think it has. And that is primarily due to the difficulties we had under COVID with meeting with customers and so forth. But we believe that there will be good development for Intercom as well without any budget increases. And lastly, the law enforcement -- police and law enforcement area, that is a good, stable revenue stream that we see continue to increase, not in huge percentage numbers, but a good steady increase and good solid running business on the law enforcement, so yes.

All right. Sounds good. And maybe 1 final question, maybe difficult to answer. But I mean, if we would see some kind of positive impact from the defense budgets, do you think that would impact you with like more large orders? Or will it be that you just see a higher flow of smaller orders as well?

I think it could be both because there are definitely a number of countries where the modernization of communications equipment in general is high on the agenda. So if some of these countries decide to make that happen, then there could be substantial orders. But that will also be a good flow of medium-sized orders and that could be new customers, but it could also be existing customers that convert from generation 1 products to generation 2 of our products. So they are a combination of that.

The next question comes from Yiwei Zhou from SEB.

Lars, it's Wei from SEB. I have 2 questions. I do want to tie and firstly, and I realized that you recently received a pretty large order for a few million dollars from the Canada for the Racal RA5100 headset, the medium noise hearing protection headset. Is there any reason why you haven't announced it?

I say, I'm not aware of exactly what you mean. I know we have some repairs for existing products going on, at that because that's the -- that's an older product, which is named 5001. I'm not really sure which one you mean.

I just saw 1 of your distribution partner highlight it last week.

I think, okay. That could be just the fact that they are talking about the possibility of selling things, but that has been -- there has not been any orders in that regard. We have a long-standing relationship with customers in Canada also for Racal products and the Racal products are repairable. So at least the earlier generation. So therefore, we have received continuous orders for service and repair and so on, but they are not of a magnitude to be a press release.

Okay. Clear. And next question is regarding in the unannounced orders. Could you elaborate a bit on the -- how much of the order intake in Q3 is driven by the new customers and from the existing customer?

I don't think we have made that mix because we -- for us, Yes, I don't have that number in exact memory. The SEK 250 million we have seen is made up by a large number of orders ranging from SEK 5 million to SEK 10 million to SEK 15 million. And I would guess that probably -- yes, you have -- I see if anybody else here has a good answer to that. I would probably think that half of it is from new customers and half is from existing ones.

Okay. Can you confirm you have not changed any policy or rule for the order announcement?

Yes.

The next question comes from Daniel Thorsson from ABG Sundal Collier. Please go ahead.

Yes. Lars, I have a question on -- this is Daniel from ABG here. So looking into 2024 do you think we will see the strongest growth in Europe or North America? Or do you see similar opportunities in both?

Yes, that's a good question. I would definitely say that we will see strong growth in Europe and rest of the world. I also hope we will see strong growth in North America. We will definitely see growth, but the definition -- of course, the situation in Ukraine has affected European countries a lot more. So that's why I would think that larger growth would be related to European markets, but there are also activities and programs and opportunities in the U.S. that could give us very, very good growth. So -- but yes, just off the bat, probably a little more in Europe than U.S. at this point.

Yes. Makes sense. I see. And then I guess it's kind of a follow-up to Hjalmar's question in the beginning, risk on 2024 growth here, comparing to your target of 20% annual growth, do you think there is a risk that you may come into 2024 and realize that we have a very tough comp from growing extraordinarily strong here in 2023. And therefore, we can see a year with somewhat slower growth? Or do you think that the strong order book and continued order intake will offset that to reach and beat the target also in '24. What's kind of the...

At this point in time, I think we are still positive about reaching our targets. We don't have anything else on the agenda than as a minimum, reaching our targets. And I think that is possible with the activities we see around the world and with our strong position and our product portfolio and also, of course, the usual product launches that we have every year. So -- so no, I think we are in good shape for continued growth, and I would expect us to be able to grow also in 2024.

Yes. Yes, sounds fair. And then thirdly on the gross margin in the order book, can you say something about that because the order book is quite large right now. It's products in different regions, different product mixes, lots of Racal products, et cetera. How -- how do you think that the gross margin will play out here in the coming 2 to 3 quarters for the order book this year to be delivered...