Invisio AB

STO:IVSO

Earnings Call Transcript 2021-Q1

[Lars Højgård Hansen, President & CEO]

Thank you very much, and welcome, everyone, to our Q1 presentation. The highlights for our Q1 are 2 things. First of all, we are slowly but surely seeing an increased activity market -- in the market, especially in the U.S. And the second highlight for our Q1 has been the integration -- or the start of the integration with Racal Acoustics, that is proceeding according to plan.If we turn to Page 3, and look at the financial results for the quarter, we saw our revenues increase by about 23% in the quarter, 26% if we look at the currency impact. So we ended at approximately SEK 144 million. Our gross profit was increased with approximately the same amount, which -- or percentage, which means that the gross margin was same level as in previous year or same quarter last year.Revenues related to the Racal Acoustics product line contributed with a little over SEK 20 million in the 2 months, February and March, that they have belonged to the INVISIO Group. We were also quite pleased with our order intake that amounted to SEK 137 million compared to SEK 90 million last year. And of course, also part of that is related to the products under the Racal Acoustics line.Our order book then at the end of the quarter was at SEK 191 million, which then also includes the order book that the Racal Acoustics products have brought into the group. So all in all, this has been uneventful, I guess. And one thing that we will mention for the quarter is that depreciation and amortization has increased.As you will see on the next, Page 4, where we have specified that. There are 2 reasons. First, that we have now started depreciation of products that we have successfully developed and are now starting to sell. Those includes products that you are aware of, like the new intercom system and our T7 headset, but it also includes certain products that are part of our normal product development and that are not yet publicly announced that will be shown later in the year when we have the possibility to attend public events, like trade shows and so forth. And then there is an amount, which according to standard accounting principles, are related to the acquisition of Racal Acoustics. So our total amount for depreciation and amortization in the first quarter was about SEK 10.7 million. And 6 of those -- or SEK 5.5 million or SEK 6 million for Racal Acoustics and SEK 4.5 million for the development costs of our own.On Page 5, our standard overview of our long-term development in sales and the EBITDA margin that we have decided to use in this quarter, as you can see in the sales per quarter and rolling 12 months. On the left-hand side, continue to show a positive development. On the right-hand side, you can see a more volatile development on the EBIT margin, also on a rolling basis. And part of that is, of course, the investments we are continuing to make in both our sales and marketing organization, our R&D organization, but of course, also in the continued development of new adjacent product categories that we spend a lot of money and resources on.On Page 6, acquisition of Racal Acoustics was completed at the end of January. And along with that, the current or the former, which I use, the CEO of Racal, and he's Mr. James Ewing. He's still the CEO of Racal, but he is also now part of the INVISIO Group management team. James brings a lot of wealth of information and experience from not only Racal, but also from other industries. And he will benefit our senior management team going forward, and making sure that all parts of the business is aligned.On the next page, before completing the acquisition, Racal actually had a major win with the Danish Ministry of Defence for one of their new products, the RA4000 Magna digital headset system that is for use in very high noise environments, vehicles. And Racal Acoustics was announced as the winner of this tender, and they were awarded a 7-year framework contract worth up to USD 4.7 million. The contract includes a support package with trading, consumables, spare parts, and then also an option for further follow-on orders, as required.So a framework contract is, as usual, a contract with no guarantees, but there's a good reason to expect orders under the duration of the contract. Racal Acoustics already have an order book related to the Danish Ministry of Defence and those concrete orders are part of the order book -- the total order book that we have at the end of the year.It is important just to stress that there is a little difference between how the INVISIO products for dismounted soldier use are normally delivered and how the high noise solutions from Racal are delivered time-wise to the vehicle programs that they address. We have normally, for INVISIO products, seen delivery times ranging from 2 to 6 months or maybe a little bit more depending on customer requirements and their rollout schedules. Racal sometimes see a little longer schedules for their delivery plans because when they sell headset systems for vehicles, they are sometimes tied to the rollout of new vehicles with the military organization. So therefore, when Racal receives an order, it could be that part of the order is for immediate delivery and part of the order is only for delivery next year when the customer receives more vehicles, as an example. So all in all, that's -- yes, just a characteristic of the high noise environmental market.Page 8, we, as I said, are in full integration mode between Racal Acoustics and INVISIO, and we will be operating under the INVISIO Group, but with 2 very strong brands, Racal Acoustics for high noise headset solutions and INVISIO brand for soldier systems and portable intercom systems. This also means that the current organization in the U.K., with Racal, will be our center of excellence and focus on solutions for high noise environment. And we believe this is the way we will -- in the best possible way, take advantage of the combined competencies that exists across the 2 brands in all functions.We have so far only seen very good integration efforts. There is a high level of enthusiasm and good spirit in Racal Acoustics. And in INVISIO, we all look forward to bringing our fantastic solutions to the market, and we are already in the process of combining some of our product solutions to bring to the market later this year. So this is a very positive thing for both companies. On the following page, we also, during the quarter, received an order from another American elite force. And as always, this is very important for us when we get new high-profile customers that can serve as reference cases for other customers, not only in the U.S. but also in other parts of the world. But other than that, we did not announce larger orders in the first quarter, which means that the order intake of said SEK 137 million were mainly combined of a larger number of smaller orders, which, I think, is good in the circumstances we see right now where many projects have been postponed due to the pandemic. On the next page, we, yesterday, had our General Annual Meeting, where the press release was also sent out yesterday, the summary of the meeting. The proposal from our Board of Directors about a dividend of SEK 0.70 per share was approved and will be executed in the coming days.On Page 11, we continue on our long-term path of executing our strategy. And in 2021, we will have a number of focus areas, one of them, of course, the continued integration of Racal Acoustics, making sure that we take advantage of all the opportunities we have with the 2 brands combined in one group. And one of the first efforts we have seen successfully integrated is the sales teams that will focus as one group now, focusing on all the products we have in the group. Our Intercom system is also continuing to see huge interests, despite the difficulty with meeting customers in person. We are having a high activity level for our Intercom system, both in Europe and also in the U.S. We did receive orders for the Intercom in the first quarter, and we believe that we will, especially in the second half of the year, be well-positioned for good orders for the Intercom system.It looks very promising. And it also sometimes open doors with customers that do not have INVISIO, sold you our hearing protection systems yet so that the Intercom system will actually be the door opener for them for also buying other types of equipment from us or under the Racal brand, as many of the Racal headsets are suited for high noise environments where the intercom will also be used. So makes a lot of sense for our total product portfolio. Our law enforcement and security efforts will continue as well. We have now with our own organization and our global network of distribution partner, a good setup, both in the U.S. and in the Rest of the World, and we will continue to utilize our combined product portfolio to make sure we gain more ground and increase our foothold in many of the larger markets towards law enforcement and security. So we've seen good progress in 2020, and we expect to continue to gain ground in 2021.We've also seen, prior to the pandemic, that we were making good progress in -- especially in Asia. And we believe that this will soon be back on track. We will definitely focus on that region and also the Middle East in the coming year and making sure we take advantage of the opportunities that are available.We have, in 2020, had quite high number of new hirings into the company, increased our level of resources significantly, also with the acquisition of Racal Acoustics. We will continue to support our focus areas with more resources where needed, but at this point in time, we do not see the same recruitment speed as we saw in 2020. So we will now just take a little step back and support these different areas where we see the need for more resources. Again, we are in the early phase of the Intercom and law enforcement investments. So therefore, it is possible that there will be a need for further investment, especially in salespeople, as soon as we are able to address more markets and when we can see that the interest is higher than what we can cope with, with our current setup.So on Page 12, fun slide. So we believe that the continued rollout of vaccines and a gradual return to more normal conditions will also soon mean a rise in the activity level with our customers, and that they will continue the modernization programs for hearing protection and communication in high noise environment. We have seen many postponements and delays due to the pandemic. But now that both the U.S., U.K. and other markets are slowly but surely opening up, we hope and believe that the customers will soon be back in their normal positions and the activity level will continue to go up. So we have all reasons to continue to be very positive about the continued development of INVISIO.So with that, I conclude our presentation of the Q1 financial report. And operator, we are ready to take questions, please.

[Operator]

[Operator Instructions] And your first question comes from the line of Viktor Westman from Redeye.

[Viktor Westman, Analyst]

Maybe we can start with one question about Racal Acoustics. What do you see as the main growth opportunities for Racal? And what are the main challenges?

[Lars Højgård Hansen, President & CEO]

Well, I think the main opportunities are actually bringing many of the Racal products out to a broader audience, as Racal was previously part of a large Corporation where they did not receive maybe enough attention. I think the fact that they are now part of the INVISIO Group and the large sales organization, we have -- we'll make it possible to bring out the products of Racal to a much broader audience, especially in the U.S. where they haven't had too big of a market share in recent years. And Racal has some really impressive newly developed products that are state-of-the-art and is definitely market-leading. So we look forward to bringing those products out.And then secondly, the combination of the Racal products with the INVISIO products is a very strong offering to the market where we can then cover both dismounted and mounted solutions for the users. And it all works in one system with our patented cable technologies and so forth.So -- and your question about the challenge. Well, the challenge as always is that things takes a long time in our business projects are along, and that is not different for Racal Acoustics' product line. They are often related to new acquisitions or upgrading of vehicle communications and so forth. So it's the same type of time lines as we have been used to for our type of business.

[Viktor Westman, Analyst]

And why is the -- why has Racal Acoustics not won much business in the U.S. in the past? Are they -- I mean are they compatible with all the different types of tanks and vehicles, et cetera, or tanks in the American tanks? So is there any reason why they are not -- have not focused on U.S.?

[Lars Højgård Hansen, President & CEO]

No, they have. It was maybe put wrong. They have had a focus on the U.S., and they have also been successful in the U.S. in the past. It's only, I would say, in the last couple of years or so where they have been part of a large organization. And while developing, some of their newer products that the newer products have not been brought to the market yet, so -- but they do actually -- I mean they do absolutely have sales in the U.S. today and so forth. But I think the total sales organization for Racal has been 5 people. And for INVISIO, we are 40 people. So that alone will make a huge difference when you address the global market.

[Viktor Westman, Analyst]

Yes, definitely. And then shifting gears to Asia then. Can you say something how the hearing aid costs look like here compared to your, for instance, the U.S. market? Are there the same type of veteran programs with hearing aids and those associated costs in the Asia? Or how does that look like?

[Lars Højgård Hansen, President & CEO]

Good question. I'm not fully on top of the costs associated, but I'm sure that they had the same issues with hearing deficiencies from high noise, and you see -- as you see in the western world. So -- and I'm also sure that they have a high focus on this because as soon as somebody loses his hearing or has hearing deficiencies, it is possible to do the job that you were trained for, without a hearing aid or different types of help. So the focus is always twofold for our products. One is to, of course, reduce or take down the risk for hearing loss and hearing divisions. The other is that you are able to communicate more efficiently and clear in high noise and, thereby, not get hurt or getting to the wrong situations.

[Viktor Westman, Analyst]

And last question on the segment of the Rest of the World sales. I noticed there was a handsome pickup in sales to SEK 24 million. Are those pilot orders for some of the new Asian market? Or can you give some more color on what...

[Lars Højgård Hansen, President & CEO]

Yes. Yes. They are definitely pilot orders with special forces in different countries in Asia. But it's also fair to say that the Asian region has been the most difficult for us to address during the pandemic because of the total closedown and inability to visit customers. And simply also, that acquisitions or some of your programs has been postponed and delayed. So that has been -- we expect that -- we don't see that we have lost opportunities in Asia, but rather that they are put on hold for different reasons. But it is also very important to be on site when you address the markets in Asia. And there, the pandemic has made it difficult in the short term.

[Viktor Westman, Analyst]

Yes. And on that note, Lars, just last question there. Do you need more boots on the ground than more -- potentially more offices in Asia besides Bangkok?

[Lars Højgård Hansen, President & CEO]

That is possible. That is possible. That is what we are constantly reviewing. As soon as we see activity levels going up, opportunities increasing, then, of course, we will be looking at when -- where do we need to apply more sales resources to follow up on the opportunities.

[Operator]

And your next question comes from the line of Yiwei Zhou from SEB.

[Yiwei Zhou, Analyst]

A few questions from my side. Firstly, a follow-up question on Racal. You previously mentioned the profitability for Racal's lower end, but has the potential to reach ambitious margin. Now it's 1 quarter into integration, has your expectation changed? And what is the time line for the margin improvement?

[Lars Højgård Hansen, President & CEO]

I think that this is, of course, an ongoing process, but I think that we know that Racal's business model includes selling through system integrators and large partners. And by definition, that sometimes gives a little bit of lower gross margin. But I think that's already announced. And as you can see, in the first quarter, we are actually at the same level as last year for gross margin. So there's no impact from Racal in this quarter. And I don't think that there will be any larger impact from the Racal business going forward. We are doing a number of things to make sure that we have solid gross margin in all product lines that -- so I think that we will -- it will be a marginal impact on us.

[Yiwei Zhou, Analyst]

Great. And then, secondly, so the order intake in Q1, SEK 137 million, is it possible to indicate how much was relating to Intercom? And how much was Racal product?

[Lars Højgård Hansen, President & CEO]

No. We have decided not to do that. I will only say that we continue to see order intake -- satisfactory order intake on the Intercom. But I think that quarter-by-quarter, we will not be disclosing numbers. We would be looking at it on a yearly perspective and follow-up on this as we see interesting orders coming in and hopefully also orders of a certain magnitude. And the same for Racal, because already now, the Racal product line is being integrated with the INVISIO product line. So it would not make sense for us to split it up because a customer might want to ask for a headset from Racal, and then a control unit and cables from INVISIO, and the customer doesn't really care whether the headset has one or the other brand. So therefore, it doesn't really make sense for us. We will not -- we will operate as one group, one company. So therefore, we will not split it up. But we have agreed to, at least for a couple of quarters, to say how much of sales is related to the Racal product line, but not more than that.

[Yiwei Zhou, Analyst]

Okay. And lastly, CapEx spending. I mean looking at the latest CapEx for -- I mean I'm talking about the development cost capitalized. It was only SEK 19 million for 2020, and it was a big jump from 2019 and 2018 level. And now into the first quarter of 2021, it looks like continued to decline. So what is the implication here? I mean how should we look at your CapEx spending for the coming years? And any implication to your product pipeline?

[Lars Højgård Hansen, President & CEO]

Well, in terms of -- we have seen a lot of our product development efforts being finalized in 2020. And therefore, of course, there is a huge increase now, as you see in Q1. And given the size of the organization and the increased activity level, we have, of course, already initiated new development projects that the organization is working on. So it is a higher, you can say, activity level, in general, for the company.And as I said, we have not been able to publicly announce all of the new products yet because of the pandemic, but we will do that during the year, even though some of these products are already selling and shipping to customers. But since they are part of our normal product portfolio, we do not see a need to announce them until we have the possibility for doing it.

[Yiwei Zhou, Analyst]

Is it possible to give us indication of your CapEx spending for the coming years? And how should we compare it to 2020 level? I mean you had only SEK 19 million in the capitalization of development costs in 2020 and it was a decline from 2019?

[Lars Højgård Hansen, President & CEO]

Yes. I think you should see it in the same way as the Q1 level we have released now.

[Operator]

And your next question comes from the line of Jesper Birch-Jensen from ABG.

[Jesper Birch-Jensen]

Lars, first off, you might have already answered here. But in terms of the order book, you mentioned that it stood at SEK 190 million at the end of Q1. And you also mentioned there is different delivery times for INVISIO versus Racal. So an interesting question that is, approximately what percentage of the order book is INVISIO versus Racal? If you can give any indication on that.

[Lars Højgård Hansen, President & CEO]

Well -- no, again, we have decided not to split it up because we will be operating going forward as one group. So these are just product lines within the company. So we will not. But I will say still that the majority of the order book is for 2020 -- sorry, 2021 deliveries. So it is not like the majority of Racal. Order book is further down the line. It is a smaller portion of their order book that goes into following years. So all of -- majority of what you see in the order book is for deliveries during 2021.

[Jesper Birch-Jensen]

And also in the report, you mentioned that the market activity in the U.S. especially has been picking up here in late Q1. And I'm wondering like how far away is this from a normalized state? And also how far behind is Europe lagging compared to U.S. currently?

[Lars Højgård Hansen, President & CEO]

It's a little difficult to say. And I would also not -- I will be cautious not to overdo the activity level, but -- as we all see and know from the news, the rollout of vaccines is going very fast in the U.S., and they are state-by-state returning to more or less normal life within a quarter or so. So that, of course, also means that many of our customers will be returning back to their physical locations for work.And many of our customers, in general, we have seen -- have had challenges working from home because their systems are not set up for being from home. So there has been many delays and difficulties. So but at least now, our U.S. sales team is out and about visiting customers again. So we do see an increased activity.In Europe, as you know, it is a lot more difficult still because the vaccine rollout is going somewhat lower. Certain countries are better, like the U.K. I hear from the team that they will be, probably at the end of May, able to be at work for majority of the time physically. And for other markets in Europe, it's a little bit further down the road, but still improving. Asia takes probably a little longer. From what I hear right now, we are still -- yes, a little behind in terms of the opening up of the different countries there. So we will have to follow this closely in the coming quarter and see but, at least, it is more open than it was 3 months ago.

[Jesper Birch-Jensen]

My last question is just in terms of the logistical situation. I mean we were hearing a lot about delays in expenses, shipping components and products from [indiscernible]. For example, -- or what's the situation like here? Or are costs still higher than usual? Or what were you seeing there?

[Lars Højgård Hansen, President & CEO]

It's under control for us. I think we -- as we have said before, earlier in the pandemic, we also shipped a lot of products to the U.S. to be closer to customers. And so I think the shipping costs are at a more normal level at this time. And when it comes to components, of course, we are following that very closely. We have not seen any issues for us yet. So -- and we have no indication, at this point, that we will have any issues, but we are, of course, following the situation very closely as any other company that has to do with electronics. So -- but so far, so good.

[Operator]

And your next question again from Mr. Viktor Westman from Redeye.

[Viktor Westman, Analyst]

I wanted to ask about the Magna RA4000, if this is a super niche product, I mean, high-end? Or is it possible to convert a large part of the installed base to this products? And what would be that effect, if so?

[Lars Højgård Hansen, President & CEO]

Absolutely. It is a high-end product, but it's not a niche-niche product. I think this is a very relevant product for anyone, being a driver or being constantly in vehicles with high noise. And I think that this is -- some of the competitive products to these are, for instance, from Bose, who has been supplying products for vehicles for many years. And comparing to Bose, the Magna is a much more modern up-to-date digital headsets. So we definitely believe that we can take market share with this product. But I think that the need for very high attenuation levels, hearing protection, is increasing, not only within the Army, but also in other areas. There is a much higher noise level than only some years ago. So these high levels of attenuation is something that is very much looked for. And we can, over time, both develop the Magna headset with different variants, but maybe also take it broader from a user point of view than what is the case today. But this is some of the things we are now investigating and exploring with our new combined sales team.

[Viktor Westman, Analyst]

So where I'm getting us is that you had one other older product that have sold in several hundreds of thousand units. So I was just thinking the difference in pricing with this -- the Magna product should be quite substantial? So that should be an important growth driver then for Racal?

[Lars Højgård Hansen, President & CEO]

Yes. Absolutely.

[Viktor Westman, Analyst]

Okay. And another question. Is it fair to say that the Intercom solution will be the first, the new growth driver to give a meaningful contribution to sales if you compare it to the police -- the police vertical and the new geographies. As I say, Intercom is a bit faster than the others in contributing?

[Lars Højgård Hansen, President & CEO]

Yes. I think that they have different dynamics because the -- if you take the law enforcement, that is more of a distribution and sales effort where you are -- where we are selling what we already have into new user groups. But where we also see that this is a different way of selling because it is much often, it is much lower volumes, and you have to go through distribution to reach all the different users. It's not centralized in the same way we see on the military market. The Intercom, on the other hand, yes, you are right. But it follows the -- yes, say the time lines we've seen before, it takes a while to sell in and then the testing procedures needs to be done. The funding needs to be in place, and then the orders could also be substantially higher than what we see, for instance, for law enforcement. So as we've said before, we believe that the Intercom investment, over time, will be a very important contributor to INVISIO. And of course, this is not just one product, this is getting into a whole new product area where we can see, that we can operate, not only with military customers, but we have also actually sold the first units to law enforcement vehicles.

[Viktor Westman, Analyst]

Okay. And speaking about more enforcement there, you have a good foundation with the distribution and the sales team. What's next in terms of the law enforcement? But are there any actions you need to take? Or are you just adding everything? Or what you do? Yes.

[Lars Højgård Hansen, President & CEO]

We -- the first step is, of course, to sell what we have. And as we have said, what we have today, the military solutions, will fit with many law enforcement users as well, especially in the top tiers of law enforcement users, the right crowd teams, SWAT teams and so on.And our next move is, of course, to broaden the product portfolio also for law enforcement, with products that will address maybe the lower end of Tier 1 and Tier 2, but maybe also go a little bit further. And one smaller initiative was the collaboration with EMEA, where we address a different type of police and law enforcement needs with those types of ear tubes. So you will see over the coming years that we will expand the product portfolio that addresses nonenforcement users.

[Viktor Westman, Analyst]

Yes. Just the last question on the Intercom. You mentioned the need for further resources in both sales as well as development and you wanted to drive more penetration efforts. Can you just give some more color on what exactly you are wanted to do here?

[Lars Højgård Hansen, President & CEO]

But it's a little bit of a circle in the sense that, let's say, we have 2 salespeople. And then with 2 salespeople, we know that we can handle, let's say, 5 intercom sales projects. And then we need 2 or 3 people in support and R&D for that amount of business. If we certainly see that now we actually have 10 or 15 relevant intercom customer projects, then we need to look at what more resources do we actually need to cover these projects in a meaningful way. So -- and those investments, of course, always come before we get the order. So it is a snowball, a little bit that when we can see that the activity level is increasing then we need more support, then we need more sales to support those projects. So it is an ongoing process.

[Viktor Westman, Analyst]

And I assume you have a quite good leads for the increased action when you take the decision to hire more people there? It's not...

[Lars Højgård Hansen, President & CEO]

Yes. I think -- I mean it is easy to say that if we -- when we show our Intercom to almost -- it doesn't really matter who we show it to, almost everybody would like to try it. That's the first step. Can we try it? And then after that, it is our task to try to find out. Is this just trying because they think it is fun to try or are they trying it because they actually have funding available in the foreseeable future? And once we can see that here are business opportunities where there is money behind, then we will, of course, need to make sure that we have enough resources to address it because it is a complex product also to sell because it requires a lot of cables and interfaces to all the equipment they had. So it does require resources to follow up some. But it is an ongoing process here where we follow the activity level closely.

[Operator]

And your next question comes from the line of Yiwei Zhou from SEB.

[Yiwei Zhou, Analyst]

Lars, just a quick question regarding the GSE contract. Can you sell Racal's products through the contract?

[Lars Højgård Hansen, President & CEO]

Yes.

[Yiwei Zhou, Analyst]

Do you want to confirm?

[Lars Højgård Hansen, President & CEO]

Yes.

[Yiwei Zhou, Analyst]

Okay.

[Lars Højgård Hansen, President & CEO]

That we can -- but we have -- it -- on the top of my head, as I recall it, twice a year. I think some of the -- some of Racal products are already on other companies' DSA contract. But we have an opportunity, at least twice a year, to put new products, including our own new products from INVISIO. And then, now also including Racal, we can put those on to the DSA contract twice a year

[Operator]

Thank you. And there are no further questions at this time. Sir, you may continue.

[Lars Højgård Hansen, President & CEO]

Okay. So then that concludes our presentation of the Q1 report. Thank you for attending, and thank you for all the great questions. I look forward to speaking to you again in July after the Q2 financial report. Thank you, all. Have a great day. Stay safe.