It's 12:30 P.M. Shall we get started? Welcome to everybody to this call on the RTX Q3 numbers, and welcome to Peter Røpke, CEO, and Mille Tram Lux, CFO of RTX, and you will run through the presentation, and then afterwards, we will do a Q&A, which I will try to keep in control. So, Peter?
Thank you very much.
The floor is yours.
Thank you once again for the opportunity. And as you highlighted, we're going through the Q3 report we was issuing here in the beginning of this day. And if we move to the next one.
We can see it, yes.
So as I said, we will go through the business update. I will take care of that part, and Mille will go through some of the key financials, and then we will end up in a Q&A in the end, like we usually are doing. So let's jump into it. You can say our Q3 was reflecting improvement of revenue compared to the first two quarters of this financial year. So we are gradually sort of improving our revenue throughout the year, and ended up on a level of 142, which is slightly higher than what we were indicating before summer, when we were downgrading our expectation for the financial year.
We don't believe that will change anything for the full year because it's more a matter of orders sort of on the edge between the two quarters cut-off date. So it's more a matter of sort of when exactly our order was delivered that is reflecting the number we ended up, 142. So overall, we believe that we are in the window we expected in terms of revenue. But however, we also see slightly our customers picking up.
I will come back to the segments in a short while, but we see slightly business are picking up, but we also see some overall economic kind of slowdowns leading to a slower demand than I originally expected, and that also led to this downgrade before summer holiday. We see, which is a very positive thing, an improvement in our gross margin throughout the quarters as well, to a high degree, a normalization of the supply chain, so we don't have this customer finance component purchase anymore. In our balance sheet, we see gradually improvement of component prices, and we also see sort of the higher revenue generating a positive impact on the GM.
So, the cost sort of we are sharing across the portfolio can be shared on a higher revenue base. So overall, we think we are moving in a direction for Q3, which is getting closer to where we actually should be, gross margin-wise. Not revenue-wise, sorry, gross margin-wise. On the EBIT, on the EBITDA side, of course, that correlates with the improved gross margin, combined with we have maintained cost cautiousness on our fixed cost base. So, we have kept that flat and also did some reduction overall in the beginning of the year.
So the combination of higher revenue, improved gross margin, and cost cautiousness on the fixed cost base is leading to this result of DKK 9 million on the EBITDA level, which of course is far from where we should be, but still is indicating a trend in the right direction. This also illustrates that actually some of the basic parameters in our business has actually improved and are back on a level where it should be, but we still are challenged by the level of our revenue overall in the case, but are gradually improving on that one.
We did a downgrade in end of June on the expectation for the full year, which primarily was done due to a more pessimistic view on Q4, where we in the original plan back from previous year had an expectation of a faster pickup from the market, and we had to realize before summer that that would not happen in the pace that we originally anticipated, and that was the reason why we was downgrading expectation to this DKK 500 million-DKK 510 million, and then corresponding EBIT DKK 100 million, EBITDA DKK 0 million-DKK 10 million, and EBITDA DKK -40 million to DKK -30 million.
That level we maintain, and for next year, full guidance will come when we do the annual report, so we have no news on that in this point in time. If we look at the business highlights and dig a little bit further down into the segments, we of course so this performance significantly lower than previous year, which was the record high revenue, where we still had the backlog from the COVID days that we were executing on, and now we are challenged overall from two factors. First of all, there are still high level of inventory at some customers, not all of them, some of them.
We of course have overall market conditions, as we also can see from a lot of other companies at the moment, where the economy is and demand level is lower than originally anticipated, so those two factors is driving down the revenue. If we go down to the enterprise segment, it's actually a mixed bag. We have a couple of our old enterprise customers, which is actually back to a run rate level compared to prior to Corona here in Q3. They are actually nicely coming back. We have one segment within retail, which is actually performing really strong, and then we have a couple of other larger enterprise customers which still are suffering from high inventory level.
They have sort of a running business. They have a certain level of sell-out, but they have way too high inventory that they need to sort of bring down before we start to get more orders from those customers. So it's a mixed bag of reasons of why we are facing that serious situation in Enterprise. But we are sensing some pickup in some part of the business, and we see this sort of retail performing actually pretty well. On the Pro Audio, it's a little bit similar case. The mix there is a little bit different. We have two product customers that were carrying a lot of revenue last year, but they were... we can see now filling a huge inventory.
So, they're still bringing that inventory down, and we are not receiving many orders in this point in time, though they have sell-through, so it's not so that they have stopped selling our products, but it's just in a slower pace and a high inventory. On the module business, we actually see that business sort of performing as expected, and we see sort of gradually sort of the pipeline building up. Unfortunately, the value of each customer in the module business is not able to compensate for the lack of those two product based businesses at the moment. On the healthcare, it's a little bit different case.
You maybe recall back in Q1, Q2, we are communicating this deferred income of roughly DKK 20 million as a part of this change of the business model vis-a-vis our healthcare customer. So I think a more comparable picture would be to actually look at that the deferred income and the current performance and add those two, and then we are pretty close to or a little bit actually above current performance. It's a little bit tricky.
That deferred income is at the moment in our balance sheet, and the accountants and Mille is discussing kind of how to reflect that in our P&L, and expect to have a conclusion on that, but that will have an impact on the revenue, one way or the other.
Yeah, in the next financial year.
Yeah, but not this financial year. So I think healthcare is more a picture of that is one customer, and we are in this transition, and our order sort of waiting to being expedited at the moment here in Q4, plus this change in revenue recognition vis-a-vis the old design target model and the new product model, as I just explained. I think actually I think I already have been through those, so I think we just move to the financial update.
Yeah. All right, here I've selected three focus points that we have from our financial side. The change in inventory, where, as Peter has explained, we had a high inventory of components due to the supply situation under Corona, and we've worked to bring that down. In Q3, we've brought it down by DKK 9 million, and for the first nine months, DKK 11 million, and in that we also had an order inflow or a product inflow of components in both the first and a little bit the second quarter, so this reflects that we are actually reducing this. We are not receiving new components in our inventory.
Of course, our ambition to drive it down. This also correlates with the revenue, so it's not going as fast as we expected, but on all the products that we expected, and we don't have obsolete inventory that are in danger due to this. If we look at our net liquidity position, we are in Q3 improving that with DKK 13 million. For the first nine months, we are reducing our liquidity position by DKK 37 billion. That is, of course, impacted by the negative EBITDA in the nine months, but positively impacted by reduced inventory and reduced working capital.
Of course, also, we have executed this share buyback program, where we have purchased shares for DKK 5.5 million in Q3 and DKK 17.5 million for the first nine months. It's the program which is was framed to DKK 20 million in November last year, and we have just concluded the program on the 22nd August, so last week, where the full DKK 20 million was purchased. If we look to the group P&L, here we can see some of the points that Peter also already highlighted. On the capacity cost side, we can see that we maintained lower level of capacity, so we will meet this target we had on reduced capacity costs, due to these cost cautiousness and focus on cost. What is it?
Yeah, cost cautiousness and no additional hires in new positions. If we look at the balance sheet, I think that the inventory we have we have gone through, where we can see that the inventory has been reduced compared to the beginning of the year, and what I want to put attention to is also the intangible asset, because when you compare year on year, we have got this DKK 22 million, which is included in intangible assets, but also in non-current liabilities, which is this healthcare, where we purchase IP and some of the development that they've got done, we put that in on as an intangible asset, and then we have a deferred revenue there.
That was the one I was commenting on the healthcare part.
Exactly. Cash flow-wise, cash flow from operation, we've got DKK 26.8 million, basically from the EBITDA in the quarter, and then the working capital change. Cash flow from investment is in line with previous quarters, and that reflects our development, own development projects. Cash flow from financing is also in line with last year, except for this share buyback that we didn't have in the same period last year. That leads us to a cash position of DKK 100 million by the end of Q3, compared to DKK 91 million by the end of Q3 last year. That kind of concludes our... what we've selected to present, so then we'll move to the Q&A. I'll just stop sharing, then we can see participants.
Yep. Thank you, both of you, and, if anybody has a question out there, then just raise the hand, and then, you will get the opportunity to put on the question. I can start out by how you look at the market. It's obviously a combination of slower sell out of the channel with, combined with large inventories that has to come out. Do you have any visibility on when you would assume any normalization, I think, across both enterprise and pro audio? So when we should see something getting close to sell out, equal to sell in.
Yeah, unfortunately, it's difficult to comment on the segment level because you need to dig it down to the customer level, because there's different stages. As I said, some of our customers are actually back on a run rate that are similar to prior to COVID, and some are definitely not and have probably inventory for one more year. That's sort of one factor. I think most of our customers are communicating that the ones that have inventory, I have to say, and are not back on normal run rate, they are communicating that they have inventory for the next twelve months or so. But of course, that's a function of also demand, right?
Another factor which is difficult to predict is the macroeconomic situation, where we are at least seeing a slowdown, especially in Central Europe, France, Germany, which actually also correlates with what many others are reporting. Also, if you look at sort of macroeconomic sort of overall, we see more performance in the U.S., overall macroeconomically. Those are also factors that you need to bring into the picture. That's why it's not sort of easy to come with a one-liner on when, because there's many moving parts that which needs to be factored in.
But is it across both Enterprise and Pro Audio? When you talk about 12 months inventory before they have to purchase again, is that one client in one of the segments, or is it?
It's the top two product customers in Pro Audio, which I think is still sitting on relatively large inventory. They have sell-out on a decent level, but as they communicated to us, "We probably have been ordering goods for one more year than we needed." That's been sort of the communication so far towards us. On the Enterprise, as I said, it's a more mixed bag. We have overperformance from some of the customers. We are on par with the expected performance on some customers, and then we have a couple of customers that are sitting on a high inventory level. Unfortunately, those two customers I have in mind both had a revenue north of DKK 100 million each last year. So that's why you see these huge swings to the difference between zero and 100 x 2 .
So two clients who had revenue of DKK 100 million+ last year, who are-
Yeah, and-
Have plenty of inventory still.
And of course, that DKK 100 million was also, in hindsight, unrealistically high run rate because they basically was ordering too much goods. We can see now compared to what they were able to sell. So that's why you probably need to go one or two years further back to make... And of course, we have done that, to make an adjustment call of what can be expected.
Hmm. But would you see-
Two customers, to sum it up. There's two product customers at Pro Audio, and it's two Enterprise customers.
Hmm
T hat we see those problems. The rest is either sort of normalized, and some are actually overperforming.
Those who are normalized or overperforming, are those small players?
It may-
So it's the majorities who have plenty-
It's a-
Or the biggest one customer.
W e have, as I said, in the retail segment or sub-segment, seen a higher performance than expected. A good traction in that. Obviously, a market where investments are flowing in to our customers. And then we see the sort of more normalized customers, and then, as I said, we see those two that are not performing. And then we have actually been able to grow what we call SME segment, which is the small-medium, where we sell smaller quantities to a more standardized product, to a more, what should I say? Kind of more local kind of installers like ipnordic, we know here in Denmark, but there's many of those throughout Europe-
Mm-hmm
A nd the world. But they are not taking so much volume each, so it's not something that can compensate for this revenue. So that business we've been able to grow, something we also continue sort of focusing on, but it's not having a potential which is high enough to compensate for the lag. We need to get them, those two I'm talking about, back on track in order to be able to bring performance up where it should be.
Could you see-
We expect that normalization, as I said, normalization happening kind of somewhere within the next 12 months.
So could you see, if we just look at those two segments, enterprise and product, that we somewhere during next year would have a normal level? I'm not asking you if it's one, two-
No, no, but I just-
Three or four, but-
I think I don't have a different view of the market and the world than, for instance, GN Store Nord, Jabra was communicating earlier this week. I think it's a quite similar view we have.
Hmm.
And it's difficult to actually have data point enough to come with a bulletproof kind of prediction, because there are many, many, many moving parts, as I was trying to explain. So I think we have a similar view as our partners, our competitors in this sector. And everybody is reporting that it's difficult to-
Yeah, but one thing is to sell out, another is when you believe that you would equal sell out, then we can guess on the sell out.
Exactly. But the problem is that we are one step further up the chain. So, you know, before they have emptied out warehouses, they don't place orders with us, so...
So you don't dare to make a guess if you, during one quarter, would be on a level where you are equaling sell out?
No, because we don't have those data points available-
Okay
To make that kind of comment. That's one of the challenges in controlling this business with the accuracy you're asking about, because we-
Hmm
W e don't have. Our customers are not giving us that insight.
Okay. I'm just trying to avoid to get in at a too high level for the next coming year.
Yeah, so I think we are having, as I also have mentioned, and we also mentioned in the report we have very low visibility. Our customers is only giving us the absolute minimum visibility. That, so that means sort of like three to maximum six months out. And we need to do a lot of sort of management adjustment ourselves to sort of try to also guide our manufacturing partners in the right way. So it's a very tight, very short-sighted kind of business cycle we're in, which is, in my mind, also indicating that we are in a economic kind of more challenging situation, vis-a-vis the situation before COVID, where our customers were willing to share longer forecasts and so forth with us, giving higher commitments and all that. So everybody is cautious.
If we then move to healthcare, do you have any visibility into when we should expect a pickup of the new products to be sold to this one client?
Yeah, we already, as I said, that we signed the contract, have a roadmap and a signed contract of stuff that needs to be delivered, but also some of it needs to be finalized in terms of development. So we actually expect sort of now and the coming quarters to gradually both ramping up the new products and ramping down the old products. So that's something as we also communicated earlier, that will happen throughout the next couple of years. I think this overall healthcare focus is also sort of something we should see as a longer-term investment into generating growth. So it's not something that next quarter, you know, we have closed the gap. It will happen over a couple of years.
Hmm.
But gradually, quarter by quarter, as we are implementing the contract.
Okay. And then coming back to you, Mille, on this capitalization, how should we look at that going forward when you start unwinding the deferred income?
Well-
Will it be a question of just reducing the asset and the liabilities equally as a balance sheet, or will it go to the P&L when you unwind the DKK 22 million?
The conclusion is pending, but what I expect is that it will go to the P&L because it is a substitution, you can say, for a development income that we would otherwise have as a revenue stream from our healthcare customer, and then a corresponding cost in the or a corresponding depreciation. That would be my assumption, but we are clarifying with our auditors the right treatment of this.
And when you count as a non-current, earned, deferred income, then I would assume it's starting to unwind more than 12 months into the future.
That is true, and whether it's correct to have it as a non-current is also questionable, because I would expect that we will start doing it within the next financial year. So yeah, you're right. Part of it should probably have been placed in the current part.
Okay. Michael-
We evaluated that together with our auditors. Pending clarification, we just place it one place, one on one line, and then we clarify it for the annual report.
Okay. Perfect. Michael, you have a question?
Yeah. What have you done to find new customers to compensate for the big clients buying nothing? I guess a year ago you were asked if you wanted more clients, and you said, "Absolutely not. We have plenty." So what and how soon did you start finding new clients to compensate?
We are always looking for new clients and are always signing up with new clients. The challenge, Michael, as you also know, is our business model. Selling development project is that it will take twelve to eighteen months before you see the revenue recognition in our P&L when you sign up with a new client.
But how much activity have you started to compensate, and how soon did you start that?
We started-
After having-
Of course, we do everything all the time. We always try to fill up the pipe. It's also a matter of what is the capacity you have available to actually develop new products. So you can only take in kind of new clients in the same pace as we have capacity available to actually do the development, because otherwise there's nothing to sell. That's the challenge with this business model, is that we have no generic products. That's not how RTX never, ever have worked. We always have done custom-made sort of designs, so we don't have off-the-shelf products that we can sell to anybody to compensate. That's not how the business model works. Have never done, ever in the-
Do we have a capacity now to produce or develop a new client?
Well, we have-
Let me talk about. Have the capacity to develop things for new clients.
We always are filling up the pipe and always prioritizing which clients we believe carries the biggest potential. So a very large part of our capacity cost is actually spent on building up new revenue streams. So I think we try to balance that. We try all the time to take in new activities that can generate new revenue. That's how we work, always have worked. But the challenge in the model we are operating overall, as was considered visible, is that because we have the ODM model, because we do customer-made products, if one or two or three, our whole industry is sort of slipping, there's no way to compensate it because we cannot go and sell the Cisco products to Alcatel, for instance. That's a no-go.
We can only sell the Cisco products to Cisco, and that goes for all the clients. So it's not about selling what we have on the shelf. Again, you can only sell so much to a given customer that he can take, right? So yes, we have activities all the time. That's the main force, but there's no quick fixes. That's the problem due to the model we are operating.
Okay. Thank you.
That was why we have taken in the healthcare as an initiative. We have a couple of initiatives in pro audio. No, sorry, not in pro audio, in enterprise with some really huge clients. We have been building, as that was the strategy moving forward, we are building up a pipeline, a strong pipeline, and are continuing doing that for the module business. Yes, this is something we work on continuously.
Okay. Yeah, I have no further questions, apart from one question is if you can make an update. I guess maybe you're not the right to ask, but, it's a question. People talk about change of CEO. Can you... Is there anything to say about the process?
Only as we have written, that there's a replacement on his way, and then any other further questions, I have to redirect to the chairmanship, because I obviously am not a part of that process.
Sure, but the question had to be asked.
Yeah, yeah. And you also knew the answer, right?
Yeah, I knew. Okay, for me to say it's a revenue issue, and, with the visibility, there is not much more, to put on the table, in my view. So if there are anybody out there with a final question? Doesn't seem so. So I think we should end it here then.
Good.
And thank you to both of you for-
Thank you
F or spending your time.
Thank you.
Thanks for listening in.
Thank you. Bye-bye.
Bye.
Bye.