Welcome to INVISIO's conference call regarding the Q3 results, 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to CEO Lars Højgård Hansen and CFO Thomas Larsson. Please go ahead.
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 exceed SEK 300 million, highest ever for a single quarter. And that means that our sales growth for last rolling 12 months 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 two major trade shows, DSEI in London and AUSA in Washington, and those 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 a cumulative level of SEK 1.2 billion for a rolling twelve 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 nine months, the order intake is close to SEK 1 billion. It was at SEK 700 million—sorry, SEK 975 million. So we have, throughout the years, 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 wants 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 customer's 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 very good delivery capaci, 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 84, 48% if we look at comparable currencies. And for the year so far, first nine 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 a 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 nine months, it exceeds 60% for both the quarter and the nine 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.
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. 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 in previous generations. 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 nine-month period to 61.5%. So 3% up on the gross margin, and more or less the same for the quarter.
Operating expenses increases 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. Our costs are in Danish krona, in U.S. dollar, in 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.
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. 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 nine months period. We achieved 16.4 EBIT margin for the quarter and 20.2 for the nine 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 the 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, some 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. In INVISIO, due to the size of our group, we'll 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 the suffering 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. We believe that this is an important parameter for a 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 strong order intake, and we believe that revenue and profitability will remain strong over the course of coming quarters, and probably also longer than that. As always, even though we are a larger and more stable company, there will be fluctuations. Some quarters will be much better, some 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 nine months, and we will now turn to questions, please.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Hjalmar Ahlberg from Redeye. Please go ahead.
Thank you. 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 comments on that?
Yeah, I don't think the visibility is any better. I think 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 two, then we will see the outcome of the quarter. I think one of the a 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 continuing resolution, and meaning that new projects are not initiated until yeah, the situation is resolved. So yeah. 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, is it more based on market activity or any tangible evidence that is coming in the coming years?
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 interest and investigation and questions and tests and all kinds of things, but it's not turned into. The majority of it is not turned into real projects yet.
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, yeah, size of programs and so forth.
All right. And I mean, you, you do say that you expect to continue strong revenue and order intake in the coming quarters, but if you look into the kind of full year of 2024, do you think you need to see impact from, from the defense budgets to, to be able to, to grow or, or, I mean, to make another step in your, kind of run rate of 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 ADP, the audio data and power unit that we are showing now. So these new products will continue to drive a 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 2023, 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 reached 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, not in huge percentage numbers, but a good steady increase and good solid running business on, on the-
Mm-hmm.
On the law enforcement. So, yeah.
All right. Sounds good. And maybe one final question, maybe difficult to answer, but, I mean, if we would see some kind of a positive impact from the defense budget, 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,
Mm-hmm
If some of these countries decide to make that happen, then it could be substantial orders, but there 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 one products to generation two of our products. So there are a combination of that.
Okay. Thank you very much.
You're welcome.
The next question comes from Yiwei Zhou from SEB. Please go ahead.
Hi, Lars, it's Yiwei from SEB. Thank you for taking my question. I have two questions, do one at a time. Firstly, I realized that you recently received a pretty large order for a few million dollar from Canada for the Racal 5100 headsets. This medium noise hearing protection headset. Is there any reason why you haven't announced it?
I see. 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 an older product, which is named 5001. I'm not really sure which one you mean.
I just saw one of your distribution partner highlighted-
Ah.
Last week.
Okay. Yeah, that could be just the fact that they are talking about the possibility of selling things, but that, that has been, there has not been any orders in, in that regard. We have a long-standing relationship with, with customers in Canada, also for Racal products, and the Racal products are, repairable. So, so, at least the, the, the earlier generations, so therefore, we have, received continuous orders for service and repair, and, and so on, but they are not, of a magnitude to be press released.
Okay, clear. Next question is regarding in the unannounced orders. Could you elaborate a bit on how much of the order intake in Q3, driven by the new customers and from the existing customer?
I don't think we have made that mix because for us. Yeah, I don't have that number in exact memory. The 250 million we have seen is made up by a large number of orders ranging from SEK 5 million to SEK 15 million. I would guess probably. Yeah, let's 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.
Okay, cool. Thank you. I jump back to the queue.
Welcome.
The next question comes from Daniel Thorsson, from ABG Sundal Collier. Please go ahead.
Yes. Hi, Lars. I have a question on, it's 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?
Ha! 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 the 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 a very good growth. So but, yeah, just off the bat, probably a little more in Europe than U.S. at this point.
Yeah. 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 could 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 2024? What kind of-
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, no, I think we are in good shape for continued growth, and I would expect us to be able to grow also in 2024.
Yeah. Yeah, 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 do you think that the gross margin will play out here in the coming two to three quarters-
I think I-
With the order book to get to be delivered.
Without having dived into the details of it, I would think that it is at a similar level that we are reporting now, more or less.
Yeah
At a similar level. I don't see any reason for this being different from, w hen we've had lower gross margins in the past, it has often been related to programs with where we know we, for some reason, have a lower gross margin because we sell through a partner or it was something from the past. But, I don't see any reason for a significantly lower gross margin from existing order group.
Ah, okay. I see. Makes sense. And then I was thinking about, are there any interesting M&A opportunities out there, in the market? There is lots of smaller players, but anything that you would consider?
I think we are, as often said, we are not in an M&A-driven market but there are, of course, opportunities, and we are, as always, investigating and talking to others and finding out where it makes sense. We have a strong position in our market and not so many competitors, but we are, of course, also looking at new technologies and new areas where we could extend into over time. So, it is something that is on the agenda, of course, but not more detailed than that. And we, of course, have a strong financial position, so we are able to act if we find something that we think is relevant.
Yeah, I see. And then finally, on the order intake and sales here in Q4, you mentioned in the beginning that you have some delayed processes or slowing progress in the U.S. due to political reasons. Is there any risk that those are causing lower than expected order intake or deliveries in Q4, or?
I don't think. At this point, it's hard to say. I don't think so. I think this has been the case quite often, that they have been in disagreement for a while about the budgets. It always sort of turns out well in the end, but it takes some time. So, I don't think there's anything unusual in it. It just, yeah, takes a little bit of time. It's more of a timing thing if certain things.
Mm
Ends up in Q4 or Q1 and so forth. That is hard to estimate at this point. But that's, yeah, that's how it always is.
Yep. Yeah, no problem. Okay, thank you very much. That's all for me.
You're welcome.
The next question comes from Guy Thornwill from Pie Funds. Please go ahead.
Hi, Lars. It's Guy here.
Hiya.
How are you doing?
Good. How are you?
Good. I just had a quick question, actually, please, on the cash flow, but well, particularly, you had a lot of extra capitalized product development costs this quarter, which was like double year-over-year, went up 2x. So can you just give a bit more detail, please, on exactly what that relates to, any specific programs, or is it gonna stay at that high level, or should it fall from there? Yeah, I think like SEK 28 million of capitalized product development costs this quarter, SEK 14-15 million a year ago.
Yeah. So it is, of course, related to a high activity level, both in what we have been doing over the last 3-4 years, and that we are now seeing the impact of in the market. So I think some of the fluctuations that we see in general, of course, there's a much higher activity level in R&D. We have hired many more people in R&D over the last two years, and majority of expenses is salaries.
Yeah.
And we are just, of course, following the IFRS rules and set up for how we do that. So that's why also sometimes there are fluctuations. So there's nothing in the quarter that impacts this specifically. It is a longer term just related to when products are initiated and when they are finalized, and when we have to start capitalizing, et cetera. So I can't say that there's anything unusual in this quarter.
Okay. Yeah, thanks. Do you tend in a product life cycle development, does capitalization come sort of in the middle of it or towards the end, as you get-
Towards the end
Nearer to launch?
Towards the end of this. It's all. It's also, apart from salaries, then there are a number of costs at the end, because that's where you have to do external testing of the products, which is quite expensive. That's also where we buy tools and everything else needed for the manufacturing process. So, there's yeah, normally a bit more heavy at the end of development projects.
Okay. So if this stays high, the implication is that you've got new products coming to market. So yeah, I mean-
Yeah.
And then my question is, do you have, you know-
Yeah
New products, quite a few new products coming to market in the next 18 months?
Yes, we do.
Yep. Yep, great. Thank you.
Welcome.
The next question comes from Jakob Marken , from Danske Bank. Please go ahead.
Yes, hello, Lars. Thank you for taking my question. Just, two quick ones. So the first one related to the gross margin. I was thinking in a quarter like this, when you have a lot of small orders, should we think that the, this affect the gross margin going forward in any way, or is the gross margin more or less similar, if it's a small order or large order?
Normally, they are similar, but what could impact is, for instance, and especially in some of the retail business, where it's related to collaboration with big system integrators and vehicle manufacturers. So when it is related to a vehicle program, for instance, then sometimes we have a little lower gross margin, and also related to larger volumes. But I would say also that the gross margin of 60% is an average of a wider span of gross margin. So some of the law enforcement orders we get are at a lower gross margin. There we often sell through resellers, so there, the gross margin is probably closer to 50 or even below 50. Then we have other business where we are quite a lot higher than 60. The 61 reported here is an average.
Okay, thank you. And I was wondering if you could quantify how much of the increase in OpEx quarter-on-quarter was related to the provision, and how much was the rest?
It's probably in the vicinity of SEK 15 million. That was an extra provision this quarter. 15.
Okay. Yep, thank you. That's all for me.
Welcome.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. The next question comes from Yiwei Zhou , from SEB. Please go ahead.
Hi, Lars. Two more questions from my side, and firstly, could you maybe give us indication on the OpEx level for Q4? And should we just exclude this SEK 15 million provision? And then take the underlying level in Q3, or we should expect the increase from this?
I don't think you would expect an increase from where we are today. But it's too early for me to say 'cause we don't know what the financial results will be in Q4. So there, of course, we will have to take into account what happened on order intake and everything else. So, but I don't see any increases compared to where we are now.
But I guess the OpEx, you will have some sort of a budget, or when you guide?
Yes, we do. So the underlying OpEx level is more or less in line with where we are today, would be my best guess at this point in time.
Okay, fair enough. Secondly, could you maybe given us an update on the intercom? Because we haven't seen much order announcements or any update on talks on this new products.
Yeah. So as I tried just to say a little bit, is that we all know that the intercom was delayed because of the pandemic, and it's a product that you can't sell unless you are in front of customers. So therefore, we did see some delay, but the development has been quite good, I think, in 2023, but there's still a lot more to do. And we have a number of activities now, where we believe we will see orders on the intercom in the next 12 months that could be significant. And the things that we've been working on for quite some time.
I think, as with any new product, in the beginning, there is a lot of interaction with customers. There's some ideas from customers. There's some extra cables we need to make. There's some adjustments we need to make, and most of that is now done. We have a very good and stable product. We have sold it in the thousands to a global market. It's well off, but we still expect more from the intercom. As I said, I think we have a number of things in the pipeline that will show itself over the next 18 months or so. We will see a good increase in the intercom business in the coming period.
Okay. Thank you. I jump back to the queue.
Yeah. Welcome.
There are no more questions at this time, so I hand the conference back to CEO, Lars Højgård Hansen, for any closing comments.
We shall thank you for calling into our update conference, and talk to you again after the full year report in February. Thank you. Bye for now.