Invisio AB

STO:IVSO

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to presentation of INVISIO Q1 Report 2022. [Operator Instructions]

I'd now like to turn the conference over to the CEO of INVISIO, Lars Hojgard Hansen. Please go ahead, sir.

[Lars Hansen, executive]

Thank you very much. Good morning, and welcome, everyone, to our Q1 presentation. We will turn directly to Page 2 with the highlights of the first quarter. We have seen a continuation of the rise in activity level that started already in the second half of 2021. And in the first quarter of '22, this has led to a very high order intake, actually the highest order intake ever in 1 quarter in the history of INVISIO, almost SEK 400 million.

And it has been a mix of smaller and mid-size, but of course, also some larger ones that I will come back to. And this also gives us -- when we leave the first quarter, the strongest order book ever, only -- almost SEK 500 million, which is a combination of products under the INVISIO and the Racal Acoustics brand.

Now on the less positive side, we are still seeing some issues with deliveries, both on incoming components that are not as early to arrive as we have wished, but also when we are delivering to customers, we still see that deliveries are quite difficult and they take longer than we are used to. And therefore, some deliveries are delayed and this has also impacted our revenues in Q1.

On the large order side, we have a new framework agreement. And from that agreement, we received a large first order that I'll get back to. And we have several large orders from the UK MoD.

Lastly, we would also like just to comment on the geopolitical situation arising from the war in Ukraine.

Now on the next slide piece, our financial results for the quarter shows a slight decrease in revenue. Again, this is impacted by the delays in deliveries. We had more than SEK 15 million that were ready to be delivered end of March, but unfortunately, were pushed into early April, and other smaller deliveries as well has been impacted during the quarter.

Our gross margin is fairly good, almost 60% in the quarter. We have, of course, seen some cost increases from suppliers, but we have also been able to do some price increases ourselves. It is still quite difficult to predict exactly what will happen on the pricing side over time. In the short term, we can see that certain component prices are still fluctuating quite a lot because of the lack of supply. But we are confident that with a profitable -- sorry, with a good product mix, we will be able to maintain our target of 60% to 65% gross margin over time.

Now what is offering in the quarter is, of course, our earnings, because of the lower-than-expected revenue levels. So we, as said many times, have during the pandemic continued to invest in R&D, new products and in our sales organization, and those continued investments, of course, are expected to also give us higher revenues over time that we haven't seen yet. So we are confident that we will soon return to good revenue growth. And as I said, we have a record order intake, SEK 400 million and a record order book of SEK 480 million when we leave the quarter.

On the next slide, please, just a graphical illustration on the order intake on the left-hand side, for the last 10 quarters. So we can see that it is since, say late 2020, we are starting now to see a positive development again in the order intake. And also on the order book side, we see now a good positive development, of course, also helped by the acquisition of Racal Acoustics about a year ago.

On the next slide, sales and gross profit is impacted a bit more as we know from the pandemic. So the positive development here is less, but still positive. And the gross profit has been developing negatively on the 2021 a little bit, but we also know that some of that has been part of the -- or related to product mix, but also to the acquisition of Racal where a larger portion of sales is through system integrators and partners. But again, we are confident that we will be able to reach a level between 60% and 65% over time for the group.

Operating expenses fairly stable now. And I would also say that I don't think we will see large increases in our operating expenses this year. It -- we are -- we have invested quite significantly during the past 2 years, especially in a number of people. And of course, we might add a few people here and there. But other than that, we are -- we have an organization now that are able to cope with larger revenues than we currently see. And as the sales has not developed as fast during the pandemic as expected, yes, that is the main reason for the EBIT margins being lower than we have as a target in the company.

On the next slide, the first of the large orders that came through the quarter was part of a 5-year framework agreement that we received in the first part of the quarter. And it is a contract with the system integrator and related to a European vehicle modernization program where the end customer will receive a number of vehicles over the next 4 years. And the Racal Acoustics RA4000 Magna headset has been chosen for this vehicle. So we will be delivering vehicle -- sorry, headsets in the same speed as the vehicles are delivered to the customer.

So we have now received the first firm order for about SEK 90 million for volumes related to the first deliveries of vehicles. So only the SEK 90 million are part of the order book. As you might recall, we don't book framework agreements. We only book the real orders that we received, in this case, the SEK 90 million.

On the next page, we have 3 new agreements and orders stemming from the UK MoD, 2 of them during the quarter and 1 just after the end of the quarter. The first and very significant one, about SEK 90 million as well, is for our new INVISIO Generation 2 control unit platform and system, for use on armored fighting vehicles in the U.K. Our new and very advanced system that can offer double hearing protection has been selected for these vehicles.

We have also received more orders from the Tactical Hearing Protection System program which we have been delivering to since 2015. I believe, in total, we have received orders for more than SEK 270 million from this program, and this latest order was for almost SEK 30 million. And then with another customer in the U.K., we have been awarded extension or new in-service contract for 3 plus optional 2 years with this customer. So this is, of course, also a very strong signal that users are very happy with the products they have bought from us and how we support them. And therefore, they have decided to prolong the contract with us. And this is another example of the very long relationships we have with our customers and a testimony to how well our products function in their environment.

On the next slide, we are, of course, all impacted by what is going on in Ukraine these days. INVISIO Group has no business in neither Russia or Ukraine, so we are not directly business-impacted. But there is, of course, no doubt that the new geopolitical situation will mean increase the business opportunities for INVISIO.

We hear from many countries into Western Europe that the military spendings will be increased significantly. We hear that the number of soldiers will be increased. And all of that, of course, means that the need for our type of communication equipment with hearing protection will increase. We think that the larger budgets -- the more money that is being allocated will also mean that it is possible for many countries to accelerate their investments into new equipment. So therefore, this should be positive news for INVISIO.

Now as we know, in this industry, it takes time. So therefore, short term, we do not think that it will have a huge impact on us, but I would guess that from 2023 and onwards, we will start to see the impact of some of these larger budgets in certain countries, and that will definitely mean increased business opportunities for us.

So in summary, we have been through 2 very tough years during the pandemic. We are still seeing some effects in terms of deliveries, components and shipments, and we believe that this will probably continue another quarter, maybe a little longer, but sometime in the second half of the year, we think that we should be returning to more normal conditions. In the meantime, we will, of course, focus on getting as many orders as possible, and continue the very strong order intake that we have seen in the first quarter. And we will have great focus on marketing of our many new products. We are participating in a record high number of trade shows this year in all geographies, and we feel that the interest for our products is very, very high. We would also resume, when travels are permitted in all areas, our geographical expansion into certain parts of Asia, but also parts of Middle East and South America.

So I think that INVISIO is very well-positioned to continue to grow. We are very well-positioned to take advantage of the modernization activities that are happening for communications equipment and hearing protection. And of course, the increase in defense investments in the coming years will only make this trend more solid.

So with that, I will conclude the presentation of the Q1 financial results. And operator, we are now ready to take questions, please.

[Operator]

[Operator Instructions] We have the first question from Rebecka Garderup from ABG.

[Lars Hansen, executive]

We cannot hear you. Sorry. Operator, will you try again?

[Operator]

Line is still open. So maybe she's on mute.

[Lars Hansen, executive]

Any other questions in the meantime?

[Operator]

Yes. We have one question from [indiscernible] from RBC.

[Lars Hansen, executive]

It seems to be a technical problem, operator. We cannot really hear what's going on.

[Unknown Analyst]

Okay. So yes, maybe first question on the kind of sales activity and regarding what you see in terms of small order, large orders. Do you see any creativity both for small ones and large orders? Or do you have any input on the mix there?

[Lars Hansen, executive]

I think it's a combination, and it will continue to be a combination. There are definitely more projects in the making that could turn into the large orders. But I think it will be a good mix. And as we have seen also in the first quarter, it's a good mix between both the U.S. and Europe, but also between our, let's say, soldier systems, our law enforcement and police, and also relatively fair orders on Intercom. Yes. So I think we see a good mix of opportunities going forward, including larger ones.

[Unknown Analyst]

And can you say anything about -- is it mainly working with trying to get orders from existing clients? Or do you also see good opportunities in new clients?

[Lars Hansen, executive]

Yes, both. It's both. And as I said, I think that, the fact that more money will be allocated in many countries will mean that countries, customers that have maybe not been so active, will start being more active. And I hope and I think that in the upcoming trade shows that we have now in the first half of the year, we will see more activities from customers, especially in Europe, including new ones. Yes.

[Unknown Analyst]

And in terms of new markets, you mentioned that you're going to start to increase activity again in Asia, Middle East and South America. Is this something that could have impacted this year already? Or is it more like 2023 and beyond?

[Lars Hansen, executive]

I think we expect to see orders from parts -- some countries in Asia already this year, which are countries that we have already sold to. But I think -- due to still some restrictions in travel, I don't think we will see any mid-sized orders from the region until we get into 2023. But it is starting to open up now.

[Unknown Analyst]

And maybe a question on the order book. I mean we got some information about this new order that you press released, about when they're going to be delivered, but could you say something about what the delivery times are for the current order book, if it's mostly during the next 12 months, 6 months, or any input on that?

[Lars Hansen, executive]

Yes. I would say that we -- at least the order to vehicles related to Racal Acoustics for about SEK 100 million will be later and related to rollout of the vehicle. So those approximately SEK 100 million will be starting maybe late this year or into 2023. For the rest of the order book, it is -- I would say the majority will be delivered this year, pending again, component deliveries and other things. but the majority is scheduled for delivery in the second half of this year.

[Operator]

We have the next question from Yiwei Zhou from SEB.

[Yiwei Zhou, analyst]

A couple of questions from my side, and I'll do it one at a time. Firstly, looking at the U.S., I mean, the delivery has been quite soft. And I was also a bit surprised that the -- we already see [indiscernible] announced larger contract orders late last year from U.S. Army, but we haven't seen anything from you. And could you give us indication and sort of what's going on in that market? It means the largest defense market in the world.

[Lars Hansen, executive]

Yes. I think there's always a lot of -- there's not a lot of openness about when deliveries will take place. So the fact that somebody has been getting an order is not the same as they have been able to deliver. So I think those contracts that you relate to have not been delivered yet, so they are further down the road. We have seen, let's say, relatively fair orders from the U.K., not larger ones, but in the smaller and mid-size range. So there is definitely activity there. But as to those radio deliveries that you mentioned, I think they are also impacted by component shortages and delivery time. So we will not see delivery of those products until later. I don't have any information on when their deliveries are, but I assume that they have long lead times as well.

[Yiwei Zhou, analyst]

And could you maybe comment a little bit on the large orders outlook in the U.S. for next 12 months?

[Lars Hansen, executive]

Well, yes, it's difficult because -- we normally do not comment on specific opportunities because they continue to move back and forth, and you are not always sure on where the funding is until the last minute. So I think -- but there are definitely opportunities in the U.S. as well that are of a larger size, that we are working on. But whether it will happen this year or next year, as usual, is very hard to predict. And the same goes for our Intercom products that we have seen good development both in Europe and U.S., but still in a relatively small volume size. But there also, we know that there are opportunities available that could go into larger numbers. But whether it will happen this year or next year, it is always very hard to estimate.

[Yiwei Zhou, analyst]

And my next question is on the supply chain situation. You have also warned a little bit on the soft Q2, some delays. So how should we look at the second half?

[Lars Hansen, executive]

So we are still -- from the information we receive from suppliers and partners, we are still confident that we might not be up and running 100% in the second half, but we should definitely see a much better situation of both component supply and deliveries. So that's the assumptions that we are working on right now that we are going through a -- yes, a little bit tougher Q2. But after the summer, we will gradually now return to more normal conditions.

[Yiwei Zhou, analyst]

And regarding the Q1 order, is it possible for you to indicate the split between INVISIO and Racal brand?

[Lars Hansen, executive]

We -- I would only say that there is at least SEK 100 million for Racal. And I believe it they are because today, we have solutions that are, you can say, brand agnostic. So we are not so concerned about whether it's one brand or the other. We will always try to give the end user, the customer, the best possible solution, what -- no matter what brand or what solution it is. And that's also why you can see that we have sold actually INVISIO branded products to a vehicle customer in this quarter, even though Racal comes from the vehicle side. But you will also going forward, maybe see Racal branded products being sold to dismounted soldiers, which has traditionally been the INVISIO area. So therefore, we don't really want to make too much of a split. But in this case, I can say that at least SEK 100 million is Racal products.

[Yiwei Zhou, analyst]

And then actually coming to my next question here. You mentioned the sort of delivery time for INVISIO brands is normally 2 to 6 months. And given the large size of INVISIO brand orders at the moment, and you also sort of indicated continued impact from the supply chain. Do you see the risk of losing some of those orders? I know it's a firm order. Maybe your customer would not be happy to -- for your continued delay in the second half. It may become a little bit…

[Lars Hansen, executive]

Absolutely. And I think that has been a very important part of the sales process with the customers here that we have been in very close dialogue with them regarding delivery times, and also when we will be able to fulfill the entire order. So they are well aware of that situation. And for them, of course, the most important thing is to be able to plan, because it requires training and education and so forth. So we have a very close dialogue so that there will be no surprises for the end customers regarding this. So we -- that should be under control. We do not expect anyone to have any surprises here.

[Operator]

There are no further questions at the moment. We have a question again from Rebecka Garderup.

[Rebecka Gärderup, analyst]

Just a question about the gross margin that was very strong in the quarter despite the rising transportation and the component costs, but boosted by a positive sales mix. Can you say anything about the outlook of the gross margin? Any visibility into the sales mix in the next couple of quarters?

[Lars Hansen, executive]

Yes. I mean, of course, it is -- there are any components to the gross margin, everything from currency to transportation cost to component costs and increased pricing from our suppliers, but also our own increased pricing. So it is really a complicated soup that we are trying to estimate on. But I think that we have a fairly good situation here. And I think that we have also still benefit from being a growing company, so that our buying power against our suppliers, also now including Racal, is increasing and not decreasing. So short term, as we also saw in Q4, there were some extra costs related to getting a few components in faster.

We've seen a little bit of that in Q1, but not too much. But I think all in all, we should be well positioned to be able to be around the 60% or above the 60% level. That is definitely a target that we have and that we will do a lot to maintain so that we can continue to have a high level of investments in R&D and the sales organization. So we are quite confident that the combination of prices and also our buying power and so on will -- and the product mix will help us with that.

[Rebecka Gärderup, analyst]

And a question maybe a little bit related to that. How much did Racal contribute with in the quarter?

[Lars Hansen, executive]

Well, Racal is up at the same level more or less now. So I think we have been working very diligently with the Racal products and so forth. So I think that they are at the same level more or less than the INVISIO products. It's also so that, as we tried to explain in the early days of Racal that they have, of course, product sales exactly as we have at INVISIO, but the Racal products are also -- since they're used in vehicles, they are also made in such a way so they can actually be serviced and repaired. So probably around 30% of Racal's revenues are related to service or repair where the gross margins are sometimes higher than what they are on the standard product sales. So again, it's a mix of factors here.

[Rebecka Gärderup, analyst]

But sales-wise, how much did Racal contribute with -- in Q1?

[Lars Hansen, executive]

We don't split that anymore, again, also because we can – we'll be using the 2 brands cross selling. We are not separating them towards customers. And you might see -- going forward, you might see products developed in Copenhagen that will be using a Racal brand if they are more suited for vehicles, and also products that are developed in Harrow in the U.K. that could be having an INVISIO brand on it if it is for dismounted users. So we see it as 1 part of products now, 1 portfolio.

[Operator]

There are no other questions at the moment.

[Unknown Executive]

Okay. Operator, if there are no more questions, we...

[Lars Hansen, executive]

Then we thank everyone for calling in and listening today, and hopefully talk to you again after the second quarter.

[Operator]

That concludes the conference for today. Thank you for participating. You may disconnect your lines.

[Lars Hansen, executive]

Thank you.